Passive vs. Active Investing Allocations

Most investment strategies fall into two overarching categories: passive vs. active investing. This might be painting with a broad brush, but there are two schools of thought in the world of managing your portfolio. Active investing means taking a more concerted role in how your portfolio performs, whereas passive investing offers a less hands-on approach to how and where you allocate your money.

Many investors seek to find a balance between both passive and active investment strategies. Making moves on a frequent basis as an active investor may make sense for some sectors or investment types. Others, however, benefit from a “set it and forget it” mentality that requires little to no day to day management.

Crafting a portfolio that balances active and passive allocations means understanding the pros and cons of both, as well as how these attributes depend on your investing goals. Here’s what you need to know to build a portfolio that finds the right mix of active vs. passive investments, and how to get started by adding a great passive investment to your portfolio: farmland. 

How Passive Investing Works

Passive investing is considered one of the more popular investing strategies around. If you’ve ever bought stocks or shares of a mutual fund and held onto them for a significant amount of time, you’ve used a passive investment approach to an asset in your portfolio. The main idea behind passive investing is that buying and holding onto assets with a high likelihood of increasing in value can yield more reward for an investor than frequent buying and selling can. 

With passive investing, you’re likely to take a long view of how your holdings will perform over time. You’re not expecting to make a fortune on a stock in a day or week; rather, you’re priming yourself for steady overall growth during a long period of time. This tracks with the idea that the general value in the markets tend to appreciate over time. Take the Dow Jones Industrial Average as an example: the value of the Dow Jones has increased on average throughout the past 100 years. There are dips, of course, and some of them have lasted a year or more. But on a whole, the Dow—seen as a reflection of the stock market itself—has increased in value.

The Pros and Cons of Passive Investing

Passive investing has many benefits (and a few downsides) for most investors—how much of one or the other depends on your own portfolio goals, tolerance for volatility, and professional resources at your disposal. 

Many investors opt for a passive strategy out of simplicity and cost. It’s easier to do research on the holdings you’re interested in incorporating into your portfolio, making a purchase, and holding onto what you own. Well-performing companies should see their stock increase in value as time goes on, which means you’ll stand to make a return so long as you keep your position. If the stock you’ve bought pays dividends, you’ll also make passive income (or can reinvest the payout into more shares). 

Passive investing also costs less than active investing. With a passive investing approach, you’re making far fewer trades over time than you would be with an active portfolio. This can save you money if you pay for trades, as frequent trading means more fees eating into your portfolio.

There are downsides to passive investing as well, though. A passive portfolio may lead you to miss out on short-term opportunities to increase your assets. Passive investing also requires investors to take a long view on their portfolio, which means the strategy isn’t necessarily a good fit for people who want quick returns. If you’re paying for a financial advisor who manages your portfolio, you may also find that the management fees you’re paying don’t match up with the amount of work being done. Passive portfolios don’t require a heavy lift, which might mean you aren’t getting as much value from your advisor as you’d like.

How Active Investing Works

Active investing is, as you might expect, the opposite of passive investing. Active investing strategies use quick trades and short-term holdings to maximize return in a short period of time. The theory here is that there’s more to be made by dipping in and out of assets as they increase or decrease in value. Rather than riding out the highs and lows of a stock or holding over the long term, active investing seeks to make a return more quickly by seeking out chances to make a quick return.

Active investing is considered to be more complicated than passive investments strategies. In order to seek out opportunities to make a fast return on your investment, you have to watch the markets constantly and keep apprised of general trends on Wall Street. You may also need to make more significant investments in a smaller number of stocks in order to make frequent trading more profitable.

The Pros and Cons of Active Investing

Active investing is great for people who are already engaged in the finer details of their portfolio. If you have a keen interest in how your holdings perform on a daily or weekly basis, active investing allows you to make the most of your personal investments in both time and attention as you can take advantage of market trends as they happen. People who use money managers may also benefit from active investing, since they have additional expert assistance at their disposal. This can make it easier to track and capitalize on short-term trends as they pop up.

There are several downsides to active investing, however. First, it’s not for the faint of heart. Active investing means taking on a large amount of risk. Allocating more funds to a smaller set of holdings can lead to significant losses if things don’t go according to plan. And, since you’re not holding assets for the long-haul, you may not be able to see long-term value if a stock’s value increases. 

There’s also the matter of cost involved in active investing. If you’re making trades frequently and in high volume, you’re likely to pay significant fees for each of them. If your trades play out and you end up turning a decent profit out of your efforts, you may be willing to sacrifice these fees. But if you’re finding that your trades aren’t paying off, you might be losing money unnecessarily from all of the buying and selling you’re doing.

Passive vs. Active Investing Allocations: The Last Word

There are benefits to both passive and active investing, but knowing when to pursue either course of action depends entirely on your own portfolio and comfort level with making investment decisions. If you’re enlisting the help of a financial advisor, you may be more willing to pursue active investing. If you’re doing it alone, a passive strategy may be a better fit. That, of course, depends on how willing or interested you are in taking a big role in your own portfolio, as well as your risk tolerance. 

Some investments are designed to serve a passive role while generating a steady flow or returns, and farmland investing is one of them. 

Farmland Investing

Farmland is one of the most stable investments you can make. Historically, trends in farmland value move independently of trends in the stock market. Even in times when the value of the S&P 500 has dropped, investors in agriculture across the country have continued to reap returns. And, with farmland’s triple revenue streams (land value appreciation, crop yield, and lease payments) you’ll receive a steady share of quarterly or annual payouts directly to your bank account, while your profit margin grows as the land itself increases in value.

Further, with farmland investing through FarmTogether, you’ll work with a financial expert that understands the farmland investing landscape. You can choose from a slate of investment opportunities that correspond to your investing goals, and that offer the rate of return and length of investment you need. 

To learn more, read Farmland’s FAQ or sign up for an account today if you’re ready to get started. 

Frank Gogol

I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.

See author's posts