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Understand the difference between active and passive investing from "summary" of Investing Basics for Beginners by Razaq Adekunle
Active investing involves actively buying and selling stocks, bonds, or other securities in an attempt to outperform the market. This approach requires a significant amount of time, effort, and research to make informed decisions about which investments to buy and sell. Active investors often rely on market analysis, financial news, and other sources of information to guide their investment decisions. On the other hand, passive investing involves investing in a diversified portfolio of securities and holding them for the long term. Instead of trying to beat the market, passive investors aim to match the performance of a specific market index, such as the S&P 500. This approach requires less time and effort than active investing, as passive investors typically buy and hold a mix of assets that mirror the composition of the chosen index. One key difference between active and passive investing is the level of involvement required from the investor. Active investing demands constant monitoring of the market and individual investments, as well as regular adjustments to the portfolio. In contrast, passive investing involves a more hands-off approach, with investors making fewer trades and focusing on long-term growth rather than short-term gains. Another important distinction is the cost associated with each strategy. Active investing tends to be more expensive due to trading fees, commissions, and other expenses incurred from frequent buying and selling of securities. Passive investing, on the other hand, typically has lower costs because it involves fewer trades and relies on low-cost index funds or exchange-traded funds (ETFs) to track market performance.- The decision between active and passive investing comes down to individual preferences, risk tolerance, and investment goals. Active investors may be willing to take on higher risks and potential rewards in pursuit of market-beating returns, while passive investors may prioritize lower costs, reduced time commitment, and consistent, long-term growth. Both approaches have their own advantages and drawbacks, so it is essential for investors to carefully consider their options and choose a strategy that aligns with their financial objectives.
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