Active vs passive investing: which strategy is right for you?

Essentially, there are 2 different styles of investing - active investing and passive investing. Let's take a look at the characteristics of each style of investing and the pros and cons involved, so you'll be better equipped to decide whether an active investment strategy or passive investment strategy is the best fit for you.

Active investing is exactly what it sounds like: you take a personal, hands-on approach with your investments, devoting regular time to research and seek out the exact investments you plan to sink your capital into.

This means you're constantly plugged in to what's going on in the macroeconomic environment and the specific markets you're investing in. You also need to be equipped with in-depth knowledge about the investment tools and channels you pick, as well as the opportunities that would give you the best returns possible.

Usually, being an active investor means your priority is on accelerating your returns by taking advantage of a deeper understanding and an active assessment of the markets. If you're confident about a particular stock's performance, you'll have an opinion on the 'right' time to invest in it, so you can capitalise on market fluctuations and sweep up strong returns.

Naturally, with higher rewards also come higher risks, and it takes a certain level of confidence, investment experience and market savvy, as well as a lot of ground work to ensure your investments see more wins than losses.

On the other hand, passive investing is more of a more hands-off method than active investing. A hallmark trait of passive investing is that you're not the one constantly assessing or deep-diving into which specific investments to take up.

Rather than aiming to score big returns every time an opportunity arises, with passive investing, your focus is more on longer term gains. This also means your investments are meant to be held, and you wouldn't be letting go or buying in every time the markets show some movement.

Passive investing brings a fair degree of stability because you don't need to be losing sleep over every single stock you're holding due to market volatility or macroeconomic developments. Your ultimate goal is just to make sure your returns are in line with how market indices or a basket of stocks perform.

An example of this is investing in unit trusts, a type of investment fund where a pool of money is collected from investors and managed by a professional fund manager, who will use the funds to invest in a selection of diversified assets. Instead of having to personally monitor the performance of respective stocks and companies, you can depend on your fund manager to select suitable assets to include in the fund and regularly take stock of its performance on your behalf. Another passive investment tool is exchange traded funds (ETFs), which are baskets of securities from different companies that can be traded on the stock market. Unlike unit trusts, ETFs don't require active portfolio management as they involve index tracking through passive portfolio management.

You don't have to stick to just one strict style of investing. You could actually combine both active and passive investing and choose a mix of investment tools for your portfolio. The most important thing is to make sure you factor in your longer term financial goals, the length of time you want to be investing, your risk appetite and the level of involvement you want to exercise over your portfolio.