InvestorQ : How does active investing differ from passive investing?
Mary Joseph made post

How does active investing differ from passive investing?

Riya Dwivedi answered.
3 years ago
As the name suggests, active investing is when you take an active view on what stocks to buy and what to sell. In passive investing, you just buy an index or you buy an index fund or ETF. So you gain or lose as much as an index. In the last 30 years, the Sensex has given over 15% returns excluding dividends on an annualized basis. That is extremely attractive, so passive investing surely works in practice. Warren Buffett is the ultimate example of the active investor. He believes in identifying quality stocks with deep value and holding them to eternity (well almost). The focus of Warren Buffet has always been on finding stocks with a solid margin of safety quoting at discounts to their fair value. His company, Berkshire Hathaway, has been one of the greatest wealth creators in the history of active investing.
The best example of passive investing is John Bogle. The founder of Vanguard Funds is the father of passive investing in the world. Ironically, in the latest annual report of Berkshire Hathaway, Buffett personally lauded the contribution of John Bogle and his Vanguard Funds in creating wealth for investors at a very low cost. The Vanguard principle is that it is impossible to beat the markets consistently and therefore it makes more sense to put the money consistently in passive funds for a very long period of time. Remember, index funds have not taken off in a big way in India but globally index investing is very successful.
Basically, you can become a passive investor by buying index funds or index ETFs. Since passive funds do not employ high-cost fund managers to beat the market, the lower costs are passed on to the investors. It is estimated that the Vanguard funds have already saved nearly $700 billion for investors in the form of lower costs since its inception! Passive investing is based on 2 premises. Firstly, it is very difficult to consistently beat the index on a long-term basis. Secondly, for investors looking to invest through the equity mutual fund route, it is hard to find out which ones will outperform and which ones will underperform. Of course, past performance can be a guide but It is not a guarantee.