Investors divide into two categories – a passive investor and an active investor. What is the principle of this separation? What are the pros and cons of active and passive investing? And most importantly, who has higher income and why?
An Active Investor
An active investor is someone who is continuously searching for new investment opportunities. Moreover, his goal is to make a
profit here and now, not ephemeral profit somewhere in the distant future. Active investors will try to design portfolios and investment strategies based on their beliefs about individual sections of the market, to achieve market-returns with less risk and volatility or even trying to beat the market’s average returns.
An active investor always participates in the selection of a property for investment, assesses risks, carries out calculations, studies statistics and most importantly, financial news. Furthermore, he monitors and finds ways to improve a property in order to increase its estimated value for a future resale. In fact, this is an active investor’s job in essence. After all, the more deals he seals, the more profit he receives, on which he lives and continues to invest. Usually, investors trade on several platforms at once.
A Passive investor
Passive: save time and reduce risk but forgo choice. This type of investor is not interested in short-term increases or drops in the price of the purchased assets. The goal is to obtain assets with potential future growth in value, consequently generating a constant passive income.
A potential investor chooses to invest in all sources of passive income, meaning anything that will bring him continuous profit (ideally, his whole life). Such people are not interested in temporary drops in property prices, as they are ready to wait for ‘things to get better’. In contrast, active investors pay attention to the profit the asset generates, not to the actual worth of the profit.
For example, in a moment of the financial crisis, when the value of stocks drops quite significantly, passive investors are in no hurry to sell their assets but rather the opposite. For them, this is an excellent opportunity to buy shares at lower prices.
Another critical criterion for passive investors is risk reduction or diversification. To do this, they build their portfolio with the maximum number of securities. This measure allows you to protect your assets as much as possible from various force majeure financial situations in the market.
For example, if you invest all your money in the shares of one company, which suddenly loses 40% in value, you will also lose 40%. But if this company takes up only 7% of all shares in your portfolio, then a 40% drop in the value of one share will barely affect the value of your assets overall. If one value falls, the other grows, and as a result, you are always in profit.
How do I choose what’s best for me?
As an investor, you should look at your individual time commitment, investment knowledge, risk tolerance and income goals in determining whether to be a passive or active investor.
For investors who wish to have a more hands-off approach, whether due to time commitments or lack of financial knowledge, passive investing is a simple yet effective way to invest. It requires little time, either for buying, monitoring, or selling, and also lowers the risk of making bad investment decisions.
Active investing is an option for those who believe they are knowledgeable enough about the market, as well as have the time and energy, to make better investments than the overall market.
Or you can compromise and combine both approaches. Half of your funds can be allocated to index securities, and the other half - for the implementation of active strategies. Over time, you will be able to determine which principles of investing are more suitable for you since everything is strictly individual.
UK Property Advisors experts advise you fill out the Investor Profile Questionnaire to help you understand your investing risk tolerance.
Determining risk tolerance
One of the first steps in developing an investment strategy is to identify your tolerance for risk as an investor, referred to as your Investor Profile. It can depend on the goals you are investing in, as well as your personality, in making investment decisions.
Bank Merrill Edge has identified investor profiles that generally coincide with how investors characterize themselves, their objectives, and their feelings about risk. Each investor profile—Conservative, Moderately Conservative, Moderate, Moderately Aggressive and Aggressive — has an associated asset allocation based on your overall risk tolerance. Complete the self-evaluation to help identify your personal investment preferences. This evaluation will measure your reaction to market volatility and help you identify your investment objectives.
Investor Profile self-evaluation
Please read and answer the following questions. Then, use the scoring process to identify the Investor Profile that corresponds to your feelings about investing. Your Investor Profile will be based on all of your responses collectively, with no single question being the determining factor.