If asked the average trader if he makes profits that are lower, the same or higher than the market average, the most likely answer would probably be "I'm a little better than others." As you can easily guess, it’s impossible, and illusions are just illusions. But what if the market average satisfies you?
The answer is passive investing. This is a rather broad term, and in the financial world it draws huge objections, because there is no money without working hard and taking risk. For the purposes of this article, however, let's consider a passive investor to be a person who doesn't try to be better than the market is.
Active investing: strategy
No one wants to earn less than the average market growth, so an investor who actively shapes his portfolio will want to earn more. His portfolio will certainly include stocks, bonds, cryptocurrencies and derivatives, but it is unlikely to see ETFs, and an active investor won't decide to put money into a mutual funds.
Active investors should spend a lot of time on technical analysis (studying charts). Of course, fundamental analysis will also be just necessary. This investment method requires a vast knowledge to successfully predict market trends and to find investment opportunities.
Passive investing: strategy
Passive investing is mainly based on long-term operations. Some people choose to float with a sector, investing in the broad commodities market or in technology companies, others prefer investing their money in indices covering particular countries, and some diversify their capital into worldwide and all-industry indexes. The typical financial instrument used by passive investors are ETFs, described HERE. It's with their help that it's easy to gain exposure to entire sectors, without buying individual stocks or investing in specific commodities.
Unfortunately, investing passively you can still make a loss. Therefore, you should check the situation in specific countries and industries. If you see that the economic situation in a particular country is constantly worsening, or a lot of companies in a particular sector are loss-making, the investment makes no sense.
Which strategy is better for beginners?
If you are just starting out, investments may seem extremely complicated and difficult to understand to you. It's absolutely normal! For that reason, the safest solution will be focusing on passive investments, although it's also worth trying to buy on your own with a smaller portion of your capital. The amusing fact is that passive investing statistically yields higher returns than active investing.
A brief conclusion
Well, that's enough for today. You already know that while both investing strategies can be profitable and both make sense, passive investing seems to be a better choice for novice investors. If you're seriously considering investing, it's essential to learn as much as you can about it. A good source can be our blog, where we publish many valuable articles about finance, such as this one about PayPal. And if you're short of money and really want to have something to invest with, be sure to learn how to make money with Paidwork!
