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Better Investing Methods To Help You Make Money

Posted by Dario Montes de Oca

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Jul 23, 2014 3:31:17 AM


Better Investing Methods To Help You Make Money

When someone decides to start getting involved in some sort of investing opportunity, they usually want to know the answer to the question: what methods are the best for getting started in investing? There are several possible answers to that question, and it’s true that not all investment strategies are the same or will bring you the same results.

There are two main types of investing: passive and active.

What Is Active Investing?

Active investing is when someone invests in something that is a one-time deal such as the scenario of betting on a horse race. If your horse wins, then your investment will earn a profit immediately. In active investing scenarios, the investor uses approaches like different types of analyzing to choose their investments to figure out which method will bring better results and a bigger profit in a short period of time.

In the case of mutual funds, actively managed examples are those where you attempt to pick the best out of the ones in, for instance, the S&P 500 index, whereas a passive one would own all 500 of the stocks at once and wouldn’t even attempt to figure out which was the best of the bunch.

Studies have shown that actively managed stocks and bonds funds don’t usually deliver a higher return than a passively managed fund. This is due to fees, as active ones have higher fees in some cases. Plus, you have to do more research on actively managed stocks and bonds and they have a higher trading cost if you move in and out of the available stocks and bonds. For instance, if your stock index is slated to earn about 10 percent, and there are about three percent in required fees, then it will cost the investor earnings of 13 percent to get a net return that is the equivalent of the stocks and bonds index.

What Is Passive Investing?  

Passive investing would be a bit different. In using the previous example of a horse race, instead of betting on a single race, you would buy the race track and thereby get profits on all the race winners, not just the winner of a specific single horse race.

Passive investing is also a case when someone, for instance, would buy index funds so they could own the whole spectrum of the stocks and bonds that are available to give you more of a chance to earn a profit. This is due to the fact that a passive investment approach helps the investor to make a profit based on how the entire bunch of stocks and bonds do instead of basing it on how a single stock does.

The passive investment process allows someone to see how the stocks and bonds will do over time, but they want to see how they all do as a group instead of how one stock will outdo another one during a specific period of time.

One advantage of passive funds is that they usually have lower fees, and less capital gains distributions. This should lower your tax burden for this type of account. This means that one form of a good way to use a passive form of investing is to use a tax managed fund for any account not connected to a retirement account.

Confusion About Active Vs Passive Investments

When trying to figure out which is the best method of investing between passive and active, there is often a lot of argument on if, for example, a mutual fund is capable of outperforming its index. For instance, research could show that a lot of big cap funds do outshine those in the S&P 500 Index. Nevertheless, a lot of funds and investment methods are not limited to stocks or bonds For instance, something called multi-cap funds can sometimes own big or small cap stocks. It all depends on if the research analysts conclude which ones will give you the best possible performance. So, for example, a person considering this type of investment could measure up what the results would be long term by putting it up against something such as the Vanguard's Total Stock Market Index Fund.

Additionally, some people considering these types of investment get confused because their investment advisors could be using passive index funds, yet some of them use what is called a tactical asset allocation method to determine when a person’s portfolio should include a specific asset class. By doing this, the passive funds are then being used in a sort of mix of a partially active method of investment.

Is Passive Investing Best?

For most investors, especially those new in the investment world, some experts think that passive is the better investing method to use to start the investment process. This way you can work with an advisor so you can become savvier on what kinds of investments will be the best way to increase your profits in the long run. This is especially true if you don’t like a do it yourself process and you aren’t sure of what type of investments are best.

However, whichever of these active or passive forms of investment you decide to use, doing your own research is still vital so that you will not be totally clueless as to what is going on in your investment portfolio. Being involved in the investment process is important because it is a risk to allow one person or company to predict your financial future and you need to be actively involved in the process to ensure that you are getting the best possible service.

Overall, all types of investment processes and scenarios have some percentage of risk no matter how well you keep up with it or how good your advisor is. There are always ups and downs in any market and niche. That means that if you are an investor you should diversify and not put all of your investments into one area, but try to spread it out so you have a better chance of earning future profits.

Topics: Better Investing

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