How to Maintain a Balance Between Active and Passive Exposures

by Andrew McGuinness     ago. 16, 2019

3 mins read

Maintaining a successful portfolio is difficult. Not only does it require a fair amount of research beforehand, but a lot of work goes into predicting what the future may hold as well. When it comes to deciding on investments to include within your portfolio, you are faced with one of two decisions: active or passive.

Here is a list of the pros and cons that come with active and passive exposures. This will allow you to choose wisely how to incorporate both active and passive investments into your portfolio in order to create a healthy balance between the two.

1. What is the difference between active and passive exposures?

Passive investors focus on long-term investments. Passive investors invest with a semi-permanent plan in mind. They do not intend to buy and sell depending on what the market looks like, or what trends a stock is displaying. They will not budge when it comes to sudden dips or high gains.

For this reason, passive exposures include those investments that are likely to become more profitable over a longer period of time rather than being profitable at one point during the initial stages of your investment and decreasing steadily from that point forward. These investments are intended to be bought and held.

On the other hand, active exposures are a much more hands-on investment. This type of investment involves a considerable amount of tender love and care in comparison to passive investments. Active exposures imply that you are regularly keeping track of the status of this investment. They are meant to be diligently followed in order to take advantage of short-term slips or raises you may profit from.

2. Profit

For a majority of investors, passive investing is the route that leads to the most profits simply because there’s not much you can do wrong other than starting with a dud of an investment. However, any professional investor would agree that one is not as profitable without the other.

Despite the fact that research shows passive investments to provide higher gains than active ones, these are figures that have yet to scratch the surface concerning the relationship between the two and the advantages of creating a portfolio wherein they balance each other off.

3. Benefits and downfalls of active and passive exposures

While passive exposures are incredibly cheap in comparison to active ones, they are a much smaller risk. With smaller risk comes smaller returns, but this is balanced by the high returns you have the opportunity to receive with active exposure.

Passive and active investments are actually opposites in more ways than one. Passive investments have a very limited range of options to choose from, but active ones have the benefit of being endlessly flexible. Active investments can be chosen from virtually any index you see fit.

The one common advantage that active and passive exposures both share concerns taxes. Both have the chance to profit from a lower capital gain tax. The buy and hold method implemented by passive investments means that capital gain taxes are not commonly requested from investors. In the case of active investments, however, you will have to pay a capital gain tax. Before the time comes, you are able to lower this fee a fair amount by ditching those investments that are either standing still or losing you money. This way, the taxes you do pay are only for those investments that have really earned you profit.

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