Investment strategy: invest actively or passively?
You have decided to invest your money – but before it can really get started is a detailed search. However, since an investor’s success seldom has anything to do with luck, the right investment strategy must be established. But what is the right investment strategy? And is there really the right strategy?
In our contribution today, we want to dedicate ourselves to the concepts of active and passive asset management and to the question of what it means to invest his money actively or passively.
What does the investment strategy of active investing mean?
In the investment strategy of active investing , one tries to optimize so many aspects of one’s own actions that one achieves a higher return than the market. If you want to invest your money actively, you invest your savings in so-called funds . Funds are a selection of individual stocks managed by a fund manager . The fund manager tries to generate a better return than the financial market . To make the right choice of securities for the fund, a fund manager analyzes national and international markets and speaks to analysts and companies. Since a fund manager can also be wrong, he makes sure that there is always a mixture of safe and risky securities in the fund.
Indicator of the investment strategy of active asset management:
- Stock picking: In stock picking, the investor selects certain stocks that offer the most promising investment opportunities based on the information available.
- Timing: The investor deliberately chooses the best time to enter or exit the market.
- Excess Return: The goal of excess return is the purposeful drive to achieve better returns than the market. Active fund managers use a benchmark index to beat them (benchmark).
Whether a fund manager or a fund has proven itself is evaluated by rating agencies such as Morningstar . Morningstar is a financial information company and analyst firm that evaluates funds using performance, risk and cost factors. All ratings are based on a comparison of different funds.
How does the investment strategy of passive asset management work?
The investment strategy of passive asset management is to be understood as a kind of reflection of the market or a market segment. In contrast to the active asset management strategy, it is not about achieving a higher return than the market. The passive management aims only to generate a comparably high return with comparable risk. So when it comes to passive investing, you can never beat the index . But you also carry a lower risk , as the fund will never cut significantly worse than the index. If you choose an index, unlike investing actively, the forecasts and reports of a fund manager no longer matter. You can invest directly in the stocks. However, before investing, be sure to compare the costs of the different funds with the same index.
The most common and cheapest index funds are the Exchange Traded Funds (ETFs for short). This exchange-traded index fund reflects the further development of an index such as the Dax’. ETFs are well suited for private investment and allow you to invest relatively cheaply in entire markets with a security.
Tip: Frequently, the actively managed funds are recommended to interested parties. We find that both investment strategies have their right to exist and should always be decided on a case-by-case basis which of the two options is suitable.