Definition
Active investing is a strategy where an investor actively buys and sells securities based on short-term movements to profit from the price changes in the traded assets. This approach involves a hands-on strategy where the investors typically believe they can outperform the market through superior stock selection, market timing, and other tactics. It requires more constant attention and involves more frequent transaction costs than passive investing.
Key Takeaways
- Active Investing involves direct participation in making investment decisions, often by researching and analyzing market trends, economic trends and individual companies to buy and sell securities.
- Active Investing requires more involvement, time, skills and knowledge and it generally aims to achieve returns above market averages and benchmarks.
- The main risk of Active Investing is that the invested funds may not provide the anticipated return. This strategy typically incurs higher costs due to frequent transactions and it requires a thorough understanding of the finance markets and the ability to predict changes accurately.
Importance
Active investing is vital in finance because it involves a hands-on approach where the investor or fund manager constantly monitors and makes decisions related to their portfolio based on market trends, economic conditions, and individual business analysis.
The primary goal of active investing is to outperform the market index or a comparably weighted portfolio, which necessitates inherent skills, knowledge, and experience.
This strategy often demands a higher level of involvement and risk but could potentially lead to higher returns.
Hence, active investing plays a critical role in finance as it can deliver enhanced profits, provide diversification, and offer a hedge against inflation.
Explanation
Active investing is fundamentally about taking strategic actions with the purpose of outperforming an investment benchmark index or target return. It involves the active management of an investment portfolio by a fund manager, who makes decisions about which securities to buy, hold or sell.
The investor is consistently engaged with their portfolio and the market and constantly adjusts their investments based on market trends and economic factors. This approach employs various types of analyses including macroeconomic, sector, company, and security analyses.
The goal of active investing is to achieve superior risk-adjusted returns. It is used as a strategy by individuals and organizations looking to outpace the markets or achieve specific financial objectives.
Active investing allows for flexibility and deliberation in portfolio management, and can generate higher potential returns compared to a passive investment strategy. However, it requires a notable amount of skill, time and resources, given the need for thorough research, constant monitoring, and resolute decision-making in order to be successful.
Examples of Active Investing
Warren Buffett, the chairman and CEO of Berkshire Hathaway, is often regarded as one of the most successful active investors. His investing strategy primarily involves scouring the market for securities that he believes are underpriced or overvalued and thus likely to give him a significant return on investment over time. One example could be his investment in Coca-Cola. He heavily invests in the company not just because of its popularity but because he believes in its long-term financial prospects.
Peter Lynch, a famous mutual fund manager at Fidelity, is another example of an active investor. He developed a strategy called “buy what you know,” encouraging investors to invest in industries that they’re familiar with and better understand, thus giving them an ‘edge’ on the market. During his time at Fidelity, he actively managed the Magellan Fund and was able to achieve an annual average return of 29% for 13 years.
George Soros is another active investor who bets on both rises and falls in markets. His most famous trade was the prediction of the UK’s 1992 currency crisis, also known as Black Wednesday. Soros had a large short position in pound sterling, predicting that the British government would have to devalue the pound or withdraw from the European Exchange Rate Mechanism (ERM). When the pound was devalued, Soros’ position paid off, which earned him the title “the Man Who Broke the Bank of England”.
FAQs on Active Investing
1. What is Active Investing?
Active investing refers to a strategy that involves ongoing buying and selling activities by investors. It involves a more hands-on approach where the goal is to beat the market in contrast to passive investing.
2. What are the main strategies of Active Investing?
Active investing strategies include factor investing, individual stock picking, market timing, and sectors rotation. The choice of strategy largely depends on the market condition, investment goals, and risk tolerance of the investor.
3. What are the advantages of Active Investing?
Active investing can potentially yield higher returns if the investor’s decisions are correct. It also allows investors to hedge their investments, mitigating potential losses.
4. What are the risks involved in Active Investing?
Despite its potential for higher returns, Active investing is significantly riskier than passive investing. It requires a greater understanding of the market and dedication of time, especially in researching and trading.
5. Who should consider Active Investing?
Active investing is suitable for those who have a deep understanding of the market, and are willing to put in the time to continuously monitor their investments. It is not advisable for casual investors or those with limited knowledge about the financial markets.
Related Entrepreneurship Terms
- Asset Allocation
- Benchmarking
- Portfolio Management
- Fundamental Analysis
- Risk Assessment
Sources for More Information
- Investopedia: A comprehensive resource for investing and financial education. They offer a section dedicated to Active Investing. https://www.investopedia.com/
- Financial Times: A UK-based international daily newspaper with a special emphasis on business and economic news worldwide. FT offers an education segment that covers Active Investing.
https://www.ft.com/ - The Balance: Provides expertly written articles and comprehensive research on everything personal finance related, including Active Investing.
https://www.thebalance.com/ - Seeking Alpha: A platform for investment research, with broad coverage of stocks, asset classes, ETFs and investment strategy. It has a large resource of articles on active investing.
https://seekingalpha.com/
