Active vs. Passive Investing

July 12, 2024

Share this article

Active and passive investing are two different investing approaches that could help you reach your goals.

Active investors buy and sell assets whenever they believe it’s the right time to do so in an effort to outperform the markets. Passive investors tend to take a buy-and-hold approach, limiting the number of transactions they carry out, and they typically try to match, rather than beat, the markets.

Understanding the potential benefits and drawbacks of both strategies, as well as the importance of having a diversified portfolio, can help you decide which investment style might be right for you.

Remember, there’s no one-size-fits-all approach to investing.

Active vs. passive investing: What's the difference?

What is active investing?

Active investing is a more hands-on investment approach. An active investor (this could be you or a professional money manager) watches the market and makes changes to a portfolio based on what they believe will bring the greatest potential returns given market conditions.

Active investors conduct a great deal of research and analysis on market and economic trends to help them determine the best time to buy or sell with the goal of trying to beat the market’s average returns.

However, most active portfolio managers can’t consistently outperform the markets. And due to the amount of research and transactions involved, actively managed funds tend to charge higher fees compared to a passive fund.

An example of a popular active investment product is a mutual fund, which can include stocks, bonds, and money market instruments. Unlike index funds, which track index movements from the sidelines, a mutual fund is often managed by a money manager, who makes trades actively for the fund.

What is passive investing?

Passive investing is typically a less involved investing strategy and one that’s more focused on the long term. Unlike active investors, passive investors aren’t constantly trading in an attempt to profit off of short-term market fluctuations. Instead, they usually add money to their portfolios at regular intervals, whether the market is up or down.

Passive investors believe it’s hard to beat the market, but if you leave your money in, over time, you could get a solid return with lower fees and less effort.

One of the most common ways to invest passively is to buy index funds. These are pre-selected collections of securities like stocks and bonds that are set up to track the performance of a particular index such as the S&P 500. The index fund isn’t necessarily trying to beat the market. Rather, it aims to mirror the overall performance (the risk and return) of the market as closely as possible.

While index funds tend to have lower fees and expenses than actively-managed funds, that’s not always going to be the case. It’s important to read through a fund’s prospectus and take note of the fees, like its expense ratio.

Pros and cons of active investing

Some potential benefits of active investing include:

More flexibility. With active investing, portfolio managers and investors aren’t required to hold certain stocks and bonds or follow a particular market index. They can buy and sell as they see fit.
Risk management. Unlike passive investing, which rides the waves of the market, active investors can get out of certain holdings if they become too risky.

Some potential drawbacks of active investing include:

Higher fees. Because you’re paying someone to constantly keep their eye on the market and manage your money accordingly, active investing can be more expensive, and many active managers fail to beat the market after accounting for expenses. And fees, even seemingly small ones, could eat into any returns that you do have. See how fees can impact your investment portfolio at Investor.gov.
There’s no way to predict how well a fund will perform. No matter the level of investing experience or expertise, neither you nor the person managing your money can predict the future. And past performance does not guarantee future results.

Pros and cons of passive investing

If you think passive investing sounds too, well, passive, know that passive funds can sometimes perform just as well, if not better, than active ones.

Here are some other potential benefits to keep in mind:

Lower fees. Because there’s nobody actively picking stocks for you, passive investing may result in less overhead and therefore fewer and lower fees.
Tax efficiency. Since they’re usually not buying and selling on the regular, passive investors are typically not subject to large annual capital gains taxes.
Transparency. By looking at your portfolio, you can see exactly which assets are included in an index fund.

As with any form of investing, the passive strategy can also have drawbacks. These include:

Less control over your portfolio. With a passive strategy, you’re usually buying into a set collection of securities, so you won’t be able to make adjustments if certain sectors or companies become too risky or are underperforming.
Potentially smaller short-term returns. Passive investments typically never outperform the market, so you might miss out on larger short-term gains that active investing could offer.

Choosing an investment strategy

While both passive and active investing strive to earn you the best returns, there’s debate over which approach can get the job done more effectively. And the approach you choose will depend on your goals, timeline, and risk tolerance.

Generally speaking, you may want to consider active investing if you have a higher tolerance for risk and are interested in hunting down investment opportunities that could help you earn a better-than-average market return.

On the other hand, passive investing might be right for you if you prefer to take a more hands-off approach to managing your portfolio (vs. hand-picking individual securities). The passive approach could also be a good option for those who are relatively new to investing and are looking to minimize fees and invest for the long term.

You could use a mix of both active and passive investing

If you’re trying to decide between active and passive investing, know that you don’t have to pick one over the other. You may come to find that a mix of both active and passive strategies could help you reach your goals.

Remember, there’s no one-size-fits-all approach when it comes to investing. If you’re looking to put together an investment plan, consider working with a financial or investment advisor who can go into more details about your options and help you create a strategy that’s appropriate for you.

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation. This article was prepared by and approved by Marcus by Goldman Sachs® but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, or any of its affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.