Active vs passive investment

The world of the stock market has always been characterized by its level of complexity and we know that traditionally the best students are those who enter the large investment banks, being an industry that is continuously in search of the most prodigious minds.

When I talk to some of my colleagues (financial advisers), it seems like a continuous struggle to see who speaks in a more complex way and with words so technical that sometimes we look like surgeons, and many of them feel that to the extent that they use slang financial that nobody can understand that makes them better professionals and their clients will value them more and would be willing to pay more for their services

Being the reality, that if you as an investor understand in a clear and simple way how your financial advisor invests your money, you will be able to better manage the risks and overcome those turbulences.

Now, I think you will agree with me that this should be so, right?

So let’s look at this same point, but asking you the most complex question in the investment world. Among the following two schemes when investing your money, which one would you choose:

First scheme – Active Investment:

As the name implies when investing actively, complicated studies are done to try to determine which is the best investment among the thousands and thousands of options that exist, but you are going to use sophisticated technical analysis to establish the perfect moment to buy and not only that, but you will be continuously reading the news to know every second what happens with the economy or the company where you invested, thereby seeking to determine, as if you were a sniper, when you should sell that investment to generate the greatest profit about your money. Of course, this scheme brings with it that when you meet with your friends, you are considered a great specialist in the stock market and they see you as a kind of guru on those issues of the stock market and the wonderful world of finance. Not bad, right?

Second scheme – Passive Investment:

Even with the name we start badly, the investment world should be interesting, as seen in the Wall Street movies, where it is seen that the boldest and most cunning investor is always the winner. Under this investment modality, the idea is really simple, it is about doing the opposite of the active scheme, instead of trying to select the best investment, a little is invested in all the options in order to have greater diversification and as they say by There you do not put all your eggs in the same basket and if you do, you do not have to be trying to determine which horse is better than another, but rather owns the entire racetrack. Subsequently, you passively leave your investment there and wait in time, of course it is not something you will be able to boast about in front of your friends since it is passive or annoying for many.

So of the two schemes: Which one would you choose?

The vast majority of people choose the active scheme and we see samples of them everywhere, for example, with the proliferation of those apps that let you buy shares from your cell phone in a simple way that every day have been more and more used or simply for all those advertisements for courses to become a Trader (a person who actively buys and sells shares).

But which is better the active investment or the passive one?

When investing you should ask yourself the following questions:

1) I do it to earn more money or why do I need a hobby to keep me active;

2) Am I going to need that money that I am going to invest in the short term?

If the answer to these two questions is: I am investing because I want to create wealth and I do it with money that I will not need in the short term, it is extremely important that you know what the SPIVA report is (*), which from the 2002 compares the best professional investors in the world of active investment versus passive investment and shows us who has been the winner in the last almost 20 years:

Are you ready for the big surprise?

Well, it turns out that in 94% of the cases, people who passively invested in the Standard & Poors 500 fared better than those who tried to determine which of those 500 large US companies was better than the other. Showing with this historical experience that until now the passive or boring scheme is better to earn money.

So as they say over there if what you are looking for is excitement, but not optimizing your money to the maximum, better go to a casino, but instead you want to make money in the long term, passive investment has given good results throughout of the years.

Note: historical results are not a guarantee of future performance. (*) SPIVA Score Card year 2020, developed by S&P Dow Jones Indices.