Imagine you’ve just received a paycheck and after paying your expenses you have some money left over. You’re not sure if you should invest it all now, or wait until market conditions change. What are your options? There are two general mindsets to consider: Passive and Active investing.
Passive Investors aren’t in a hurry, they value spending time in the market
A passive investor values time in the market and they don’t attempt to guess when prices will rise or fall. They invest in the market at regular intervals knowing their timing may not be perfect, but over many years the market will rise and they will profit. A passive investor has long term investing goals and once these goals are reached, they may cash out a portion or all of their holdings.
Timing is everything for Active Investors, they watch the markets like a hawk
Active investors try to time their trades based on predictions about future market movements. Active investing requires an immense amount of dedication, market knowledge, and luck. Active investors such as day traders believe they can outsmart the market by picking when to buy low and sell high. They reach their short term investment goals through market timing, technical analysis, and other high risk high reward strategies.
A diversified Passive Investing strategy is the right choice for 90% of investors for a few reasons:
- Luck: How lucky are you? Consistently predicting prices by timing the market is really hard to pull off. You may get lucky every once in a while but over the span of years this becomes increasingly difficult. A recent annual report from SPIVA indicated that 86% of fund managers (active investors) underperformed the S&P500 index (passive investors) over the past 10 years. Cryptocurrencies in particular can be insanely volatile, so be especially careful when attempting to actively trade.
- Time: How much spare time do you have on your hands? Closely following markets is a huge time commitment that can easily become an emotional roller coaster.
- Mental health: Don’t weigh yourself down! Tracking your money is a healthy habbit but looking at price charts every time you pick up your phone is not. Active investors can be drawn into these obsessive habits and may be tempted to buy and sell on impulse. Instead pause and zoom out to re-examine your long term goals.
Automation tools can help bolster passive investing strategies
In summary, passive investing is a solid choice for those who value mental health and don’t have a lot of spare time on their hands to constantly research investments. Automation tools like Satoshi’s Index can be a great resource for investors who are interested in setting up a passive investing strategy that automatically builds wealth in the background.