Active vs. Passive: Where to start?

Active versus Passive Investing

You have seen, heard and watched friends, family and associates make great returns on their money in the share and property markets while you have sat there holding cash. You’re disappointed with yourself and your tolerance for cash is wearing thin.

Active Investors choose specific assets and try to buy and sell them at the right time. Don’t invest actively until you know what you’re doing! It’s hard…you might want to prove me wrong, and that’s okay, but do me a favour, start small. You see you’re feeling confident now that markets have risen, friends are in your ear about hot topics like BitCoin and Afterpay. So you buy something at a price you don’t understand, let’s say BHP at $35, and it goes up and you think you’re a hero. The problem is not when it’s up, but when it’s down. That’s when you start to doubt, second guess and start to realise that you never really understood why you paid $35 in the first place.

Now actively searching for the best term deposit for your cash might be okay, but if you’re thinking shares, get a quality adviser or some really good research to help you out. At least you can lean on them when things rise and fall (as they inevitably do in the short term). My bet is, that if BHP fell in price over a number of years you would undoubtedly lose faith, sell and lose money. That’s when world famous investors like Ray Dalio and Warren Buffett are actively buying, but they are highly skilled, experienced and deeply confident. They know the trials and tribulations of the active investor. Both agree the active investing rollercoaster leads many investors astray. For the average investor, they advocate investing passively.

Passive investors invest to a goal with limited involvement. It’s a great way to start because you get to learn good habits & rules. How about it, start simple before getting too actively involved? Or for those already active who think it’s about time they thought less about stocks and more about other pursuits, passive investing reduces the time, effort and reliance on a stockbroker, research publication or fund manager.

Start to invest passively after you have at least six months of living expenses aside with no overdue credit card debt. Don’t just invest in one stock, but rather invest a portion of your money passively in many stocks. Invest in many companies, countries and currencies to avoid the risk of one particular country doing badly. It allows you to be less emotionally involved. Add some high quality Australian Government Bonds to reduce the ups and downs and hold some gold. With the ease that the US dollar, Euro, Yen and Aus Dollar are printed, non-paper money (Gold) helps reduce the risk of losing on falling global and local currencies. And make sure you keep each % of shares, bonds and gold in check. We can do all the above for you and QuietGrowth will even recommend the suitable % of shares, bonds and gold relative to your personal circumstances.

Remember that hot topics like Bitcoin or stock tips from friends at BBQs are a gamble and so treat them like one. I know it’s hard resisting the temptation to “go all in” when you have built up a pile of cash and everyone else seems to be making money. That’s why I work with clients on passive portfolios. It helps calm that very human fear of missing out, while providing intelligent investments that unlike short term risky bets, will more than definitely do well over the longer term.

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