Active Investment

The opposite of passive investing. An active investor does all the work of sourcing, structuring, managing and exiting investments.

What is active investment? 

Active investment is a strategy in which an investor makes decisions based on their own research and analysis, as opposed to simply following market trends or investing in index funds. Active investors aim to outperform the market by selecting and managing individual stocks, bonds, real estate, or other assets.

How is active investment different from passive investment? 

Passive investment involves buying and holding a diversified portfolio of assets that mirror a market index, with the aim of achieving returns similar to the overall market. In contrast, active investment involves a more hands-on approach, with investors actively selecting and managing individual assets in order to outperform the market. 

What are the advantages of active investment? 

The primary advantage of active investment is the potential for higher returns than passive investment. By carefully selecting individual investments and actively managing their portfolio, active investors may be able to generate higher returns than the overall market. Additionally, active investors have greater control over their investments and can respond more quickly to market trends and changes.

What are the risks of active investment? 

Active investment involves a higher degree of risk than passive investment, as the investor is solely responsible for the selection and management of their portfolio. Active investors may be subject to greater market volatility, and may make mistakes in their investment decisions. Additionally, active investing typically involves higher fees and expenses than passive investing.

The fee structure for active investing can vary depending on the investment product and the investment manager. Typically, active investment fees are higher than passive investment fees due to the additional research and management involved.

Some common fees associated with active investing include:

• Management fees: These are fees charged by the investment manager for their services. They are typically calculated as a percentage of assets under management (AUM), ranging from 0.5% to 2% or more annually.
• Performance fees: These are fees charged by the investment manager if they outperform a benchmark or achieve a certain level of returns. Performance fees are typically calculated as a percentage of the excess returns generated, and may be subject to a high-water mark. This means the fee is only charged if the fund exceeds its previous high point.
• Transaction costs: These are fees associated with buying and selling securities in the portfolio. They can include brokerage fees, bid-ask spreads, and other transaction costs.
• Operating expenses: These are expenses associated with running the investment product, such as audit and legal fees, administrative costs, and other overhead expenses.

What skills are required for active investment?

Active investing requires a deep understanding of financial markets, as well as the ability to analyze and interpret financial data. Additionally, active investors must possess strong decision-making skills, as they will be responsible for selecting and managing their own investments. Successful active investors typically have a disciplined approach to investing, and are able to make rational decisions in the face of market volatility and uncertainty.

Conclusion

While active investing may offer the potential for higher returns than passive investing, it also involves a higher degree of risk and typically comes with higher fees and expenses. Successful active investors typically possess a deep understanding of financial markets, strong decision-making skills, and a disciplined approach to investing. It's important to carefully review the fee structure, as fees can significantly impact overall returns. It's also worth considering the potential benefits of active investing, such as potentially higher returns and greater control over investment decisions, when weighing the costs.

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