Active vs Passive Investing: How to Figure Out What’s Best for You
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One of the first decisions you need to make with investing is figuring out what strategy is best for you. Learn how you can find a system that will help you reach your goals faster!
Whenever people start talking about investing, especially with retirement, a lot of opinions and thoughts get thrown around.
I get it. For many, retirement i the main reason they're investing and with so much on the line, they tend to get pretty emotional about certain things.
Having a healthy (and relatively objective) debate over the pros and cons can be a fantastic way to consider your options and figure out the best strategy for you.
However, it can be also an opportunity for people to argue.
Instead of talking about whether or not something is effective or efficient, they get into emotions, opinions, and fall back to certain phrases they've heard, but not have checked.
Which is a recipe for disaster when you're investing.
Understanding Passive vs Active Investing
One big topic investors can feel
If you're not familiar with it, I think you'll enjoy this week's interview.
I chatted with M1 Finance founder and CEO Brian Barnes about some of the biggest questions investors have, including:
- the pros and cons of passive and active investing
- minimizing rookie investor mistakes
- finding tools and options that fit you and your goals
I think it'll help you figure out what works best for you and your goals.
You can watch the whole interview below or read an edited version of the highlights here.
Understanding Investing
Elle: I'm here with Brian Barnes the CEO of M1 Finance Thank you, Brian, for joining me.
Investing is a crucial component of building wealth and a lot of couples know that they should do that. But we live full lives.
Whether you have kids or not, you have your career, you have other family obligations your relationship – you're juggling so much and it seems like it's hard to get started and to maintain it.
I first heard about M1 Finance through Stacking Benjamins and it seemed like an option many couples could use. Would you mind giving a quick summary of it?
Brian Barnes: M1 Finance is an investing platform that automatically and intelligently invests your money into stocks, funds, and ETFs that you want.
So you come in and you can design a customized portfolio. Once you design that portfolio we like to say it is easy to manage just a savings account.
All you're doing is depositing (or withdrawing) money and it's enacting the plan that you want.
Elle: There's kind of two sides with investing right now. There is the higher fee and buying and selling of active managed investing where professionals trading for you (or you do it yourself).
And then there's passive investing where you choose an index fund or something similar and you kind of set it and forget it. You're not trying to time the market, just follow it.
Where do you see M1 Finance fitting in?
Brian Barnes: In some sense, we're a little bit in between those.
So let's take someone who says I have a criterion on where I want to invest my money – whether that's in certain ETF whether that's in certain individual stocks and companies.
I want to systematically contribute to it. So you might want to go to hundred dollars hundred dollars with my paycheck every two weeks.
And I want to make it really easy for me. I don't want to make investing my part-time day job.
I want to you know sort of be able to make a decision once. Here's how I want my money and I'm not having to remake that decision every single time I want to invest money.
Pros and Cons of Active and Passive Investing
Elle: Glad you mentioned investing perspectives.
With many couples, they come from two different perspectives. Like my husband is very hands off and I could do all the work for him for the investing. He's great. He just wants to focus on his career family you know. That's his style.
I like a little more hands on. I'm not a day trader; I have no interest in that. But I do like to keep tabs on finances.
But the conversation with couples is like how do we find the right strategy for us because there's a lot of strong feelings about passive investing versus active investing. And some people pretty hardcore on both sides of that.
I saw that you wrote an article on your site about that mindset and kind of giving the pros and cons to both.
Could you walk me through what those two sides are, how to weigh them, and find the right sweet spot for you?
Brian Barnes: Yeah, absolutely. I'll start with what I think is key.
I'm not saying is that personal component but if there was a one size fits all solution out there we wouldn't have this debate, everyone would do it. The issue is people differ.
They have different agendas and different risk tolerance they have different wants needs.
And so I think personal investing is finding out what works best for you and your partner.
You know I do agree that people pretty passionate about passive vs active investing. It's almost like a religious war. You know I think is a reasonable middle ground which M1 inhabits.
If you take the collection of the universe of every financial asset out there over time it's going to have one return.
And so you know if you just invest in that like on average everyone will have that return. The more you trade, the more you can buy and sell – those costs have taxes associated with that.
That cost is going to come out of the average. And so basically the more you transact the more you have costs; the lower the returns are going to be.
And so the passive crowd says the only thing that you should focus on is lowering costs as the only thing that you can ever control. And so you should lower the cost as much as possible.
And Vanguard became a giant saying cost matters. Cost is an important thing. Empirically you had a lot of evidence saying that managing costs can have an impact on the returns you see in the long run.
So that's the classic argument the active argument is you know costs do matter. It also matters what you in.
You wouldn't indiscriminately buy anything.
It's like buying a house – you want to know what you get. You would say, I want the commission to be as low as possible. You would also want to know how many rooms are there, what's the square footage, and where is it with the location.
So the active investor says it's possible to look at those things and spending time, resources, and energy to finding investments where you're getting more than what you're paying.
Over time the market will adjust the price will adjust to what the things actually worth and you'll make more money.
I think both sides have a ton of merits. I think it's again a personal decision.
Want to check out M1 Finance for yourself? See all it has to offer right here!
Thoughts on Passive vs Active Investing
Though we have most of our money invested in index funds, a portion of our portfolio is somewhat more actively managed. It fits our goals and styles.
Of course, like Brian, I believe you have to do the research and see for yourself.
If you want to learn more about investing, I have a whole episode on how diversified portfolio can be a huge win.
I'd love to hear from you – what's your investment strategy? How did you come up with it? Are you both on the same page or do you two have different takes?
This interview was originally released November 2017. It was updated October 2018.
