Alpha Teach yourself Investing in 24 Hours: An Analysis (part 51)

Active Investing (part B)

by

Charles Lamson

Advantages of Active Investing

The following is a list of advantages of active investing.

• It can generate market-beating returns.
• It involves you in your investments.
• It is fun.

PROCEED WITH CAUTION There are many advantages to active investing. One of the main advantages is the knowledge that you are taking control of your financial affairs.

Market-Beating Returns

Active investing can beat the market. There is certainly no guarantee, but it is not impossible by any stretch of the imagination.

Even if you are using actively manged mutual funds, it is possible to do better than the market. With many mutual funds, it is possible to do better than the market. While many mutual funds did not beat the market in the mid-1990s, there was a reversal of the trend toward the end of the decade.

Fueled by huge advances in the technology stocks, many funds that focused on that sector or small- and mid-cap companies do very well. It must also be noted that many of these get clobbered when the market stumbled in early January of 2000.

Active investors, whether using funds or buying individual stocks, can more sharply focus their investments. This focus, if correctly applied, will beat the market fairly consistently. The market, you remember, as measured by the S&P 500, is a broad cross section of mainly larger companies. 

JUST A MINUTE The active investor is involved with his or her investments, not in love with them. Emotional attachments can cloud judgement.

This focus is not without its dangers as noted above, but prudent active investors should be able to protect themselves against severe and prolonged downturns.

Involved in Your Investments

Active investing keeps you involved in your investments in a way that passively watching an index fund does not. Many people find they are actually more comfortable with a hands-on approach to investing.

This involvement brings them a sense of security in that they know what is going on with their investments at all times, rather than wondering what a stranger (a fund manager) is going to do with their money.

One of the basic tenets of investing is to know your investment. Some people find that they feel more comfortable with investing if they are intimately involved in the decision making.

It Is Fun

As a rule, active investors really enjoy learning more about investing and various investment strategies. They enjoy digging up information and following the financial news.

Many active investors are not motivated purely by money, but truly get a kick out of making a successful investment decisions. If you think studying the financial markets and researching companies sounds dull, consider using a more passive investment strategy.

However, if you enjoy finding new investment opportunities and researching potential new investments, active investing may be for you.

*SOURCE: ALPHA TEACH YOURSELF INVESTING IN 24 HOURS, 2000, KEN LITTLE*

END

PROCEED WITH CAUTION

There are many advantages to active investing. One of the main advantages is the
knowledge that you are taking control of your financial affairs.

JUST A MINUTE

The active investor is involved with his or her investments, not in love with them. Emotional attachments can cloud judgement.