What's the difference between active and passive investing?

Active investing: picking winners

Active investors buy and sell individual stocks or work with advisors who do. The goal is to outperform the market average. This requires research, timing, and ongoing adjustments. Higher trading frequency means higher fees and taxes.

Passive investing: tracking the market

Passive investors buy index funds or ETFs that mirror a market index (S&P 500, total stock market, etc.). They hold for the long term, rarely trade, and pay minimal fees. The goal is not to beat the market but to match it and keep costs low.

Historical performance

Most active investors underperform passive indexes over 10+ years, even before fees. High costs and the difficulty of consistent stock-picking explain this. Most financial advisors recommend a passive core (index funds) for long-term wealth-building. Some blend both: mostly passive with small active positions.