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Active vs Passive Investing

December 21, 2018 · 5 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Active vs Passive Investing

In 1973, Princeton University economist Burton Malkiel claimed that “a blindfolded monkey throwing darts at stock listings” could do as well as a professional money manager. The professor actually had no problem with the ability of some individual money managers to be rock stars.

As a group, though, he said that money managers would ultimately produce the same results as the market itself. The only difference, and it’s a big one: money managers charge incredible fees, whether they make you rich or not. Those fees slow down any progress you make, like quicksand.

This claim, said out loud, is what many investors were thinking to themselves all along. Perhaps just shadowing an index fund or an exchange-traded fund could be just as financially rewarding as hiring a money manager. The results would at least be the same, and you also wouldn’t lose money to service fees, over the course of years.

This relatively new idea is called passive investing, which simply tracks indexes without much proactive input. The older idea of active investing — hiring a money manager to fuss over and babysit your investments — is what used to be called just plain old investing. No more; now you have these two choices, and a huge decision to make: active vs. passive management.

Which one is the best choice for you? First, let’s drill down to the deeper differences between active vs. passive investing:

What Is Active Investing?

Active investing is what portfolio managers do on a daily basis; they analyze and then select investments based on worth. It’s a game, really; how it’s won is by choosing the best-performing investments. Active investing is going to cost you. You’ll need to hire a team to keep after these investments: research analysts, portfolio managers, and the service fees charged for each individual trade.

What is Passive Investing?

Passive investing burns fewer calories, but it still requires steady and careful thought and strategy. Passive investing does not include the process of assessing specific investments, one at a time. Instead, you’re attempting to match the performance of certain market indexes that already exist.

With passive investing, the market index dances and you simply follow along with the same dance steps. You build a portfolio based on an owning all the stocks in that market index, at the same proportions and percentages. Then you sit back and watch what happens.

This is in contrast to active investing, where you are investing in various stocks and constantly trying outperform the indexes. Passive investing usually has lower or no fees, unlike those portfolios associated with active investing.

Active vs. Passive Management: Which Is The Best Kind of Investing For You?

Are you the kind of investor who likes your hand held, especially during times of economic and market unpredictability? If so, an active investor may be your best bet. When the market is troubled and hard to read, an active investor shifts into high gear to attempt to do some impressive outperforming.

The hard truth about active investing: it’s increasingly being conceived as old world/old school. According to Bloomberg, investments that have flowed out of active and into passive investing funds have totaled nearly $500 billion during the first half of 2017.

With $10 trillion dollars invested in them, active funds are still king. Passive investing funds, however, are catching up. Passive investing funds accounted for almost a third of the total assets under management (AUM) in the U.S. as of July 2017. Compare that with a decade ago, when that portion was only a fifth of the total AUM. The forecast is for passive investing funds to surpass $7 trillion by 2021.

About 90 percent of active stock managers failed to beat their index targets over the previous one-year, five-year and ten-year periods, according to a 2016 study by S&P Dow Jones Indices. In their defense, active managers claim that they had to contend with the challenge of the 2008 financial crisis. Other possible answers include the idea that so much money flowing into indexes that treat good and bad companies alike could distort prices.

We’ve got you covered–with both
active and automated investing options.


Is It Possible to Benefit from Both Active and Passive Investing?

Yep. What you want in this scenario is to get the best of both worlds. Market conditions are constantly changing, so you may need a proactive, well-informed friend to navigate you through those choppy waters. At the same time, you want to be able to place your investments in an automated (passive investing) mode so that it can do its thing, but can still be altered or changed up whenever you want.

SoFi Invest® has fused the benefits of both active and passive investing. We make the most of human financial advisors who help you set up a specific, workable plan. We also utilize automated investors who keep your investments on track, by automation. The result is a hybrid of automated investing (according to a plan), professional advice and informed answers. And it can change whenever needed.

Automated advisors and human advisors may seem like apples and oranges at first glance, however, they share one very important common trait: legal status. Even automated-advisors have to register with the U.S. Securities and Exchange Commission, subjecting them to all the same securities laws and regulations as human advisors.

How SoFi Invest Can Help You Invest Actively

The SoFi advisors you’d be working with are on salary, not commission. That means no conflicts of interest or high service fees. You’ll always know what you are paying ahead of time because it’s given to you right at the start. No surprises or hidden charges.

When it comes to active versus passive investing, the answer may not come so easily to you. Getting to the solution you need may need a little preamble and talking it through. Perhaps you’re investing to achieve a life goal: a downpayment on a house, retirement, or your child’s tuition. This is definitely where you are going to need some human interaction and knowledgeable advice. We understand that these decisions are huge.

SoFi Invest also offers investing resources that can support the decisions you are looking for when it comes to your financial goals. A financial advisor can recommend the ones right for you and help you use them.

How SoFi Invest Can Help You Invest Passively

SoFi Invest invests in ETFs,a common path of automated investing. Index funds copy major financial indexes like the S&P 500 and the Dow Jones Industrial Average. That’s where our automated advisors come in. They can also track your investments. You get the advantages of passive investing without the fees and higher risks of active investing.

Your investment account with SoFi will consist of a certain percentage of stocks and bonds. Sometimes during the course of the year, your ratio between stocks and bonds may get knocked off balance. Your automated-advisor can do some rebalancing so that you continue to stick to your original plan. That correction happens automatically.

What Does It Take to Get Started?

Our minimum investment amount is only $100. You can withdraw your money at any time, and there is no minimum holding period.

Getting started also means staying committed to a plan. Whichever plan you choose, it should serve your goals, whether they be short term or long term. And even if you are passively investing, you should be paying attention to your account, learning how and why it’s doing what it’s doing, and asking many questions.

Whichever strategy you choose, it’s a great idea to start investing now. Savings alone probably won’t get you where you need to be, but investing in the stock market is risky. However, not all risk is bad; there are different levels of investing risk that can sync with your comfort level.

One way to defend yourself and to keep your stance solid is to not put your money all in one place. Instead, diversify. That can help keep reduce some investment risk.

Contact us today find out how you can benefit from both active and passive investing with SoFi Invest.


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SoFi can’t guarantee future financial performance.
This information isn’t financial advice. Investment decisions should be based on specific financial needs, goals and risk appetite.
Diversification can help reduce some investment risk. It cannot guarantee returns or fully protect in a down market.
The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Advisory services offered through SoFi Wealth, LLC, a registered investment advisor.
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