Understanding active investing

Photo by Andre Taissin

Investing is a wealth-building tool that can be as involved or as hassle-free as you want.

Active investing is a hands-on approach in which either you or a financial advisor acting on your behalf invests with the objective to outperform the market’s average returns.

Passive investing involves investments in funds like exchange-traded funds and indexes that track and invest in the entire stock market and require little to no involvement from the investor to achieve average market returns.

For those interested in a more hands-on approach to investing, the active investing strategy may be more appropriate. Learn more about active investing and what you should consider before adopting this strategy.

Research is fundamental

Active investing comes in many forms, whether it is stock-picking on your own or through actively managed investment funds or portfolios created by financial advisors.

The key to being successful at active investing is researching the fundamentals of any investment and ensuring that it meets your risk tolerance and aligns to your financial plan.

Elements of this research include performing a comprehensive analysis of the company’s financial statements and other public reports to understand its business, revenue, cash flow, and debt etc.

It’s all about balance
When assessing the fit of an investment within a portfolio, investors or financial advisors are tasked with ensuring that it does not impact the overall balance.
For example, if you invest in a company already held in an index fund you own, you are unknowingly increasing your investment in that company for better or worse. Suppose you buy too much stock in the technology sector, for instance. In that case, you may imbalance your portfolio towards that sector and see greater losses if that industry has a downturn, more so than a broadly diversified or balanced portfolio.

Know the risks

Generally speaking, active investing can yield higher returns but also carries with it higher risk.

Even with comprehensive analysis, investors are not guaranteed high returns through picking individual stocks. In fact, more often than not, they underperform the market.

The buying and selling of stocks can also expose you to cognitive or behavioural biases that can cause you to sell your investments at the worst of times or take on more risk than you are willing or comfortable to accept normally.

Active investing can be a great way to grow your wealth but is far more complex and involved than a passive approach.
Fortunately, you are not restricted to any one strategy and can implement a blend of both passive and active strategies to create a portfolio that aligns with your unique financial plan, risk tolerance and goals.