How to Blend Active and Passive Investment Strategies

Diversification is the key to any successful investing. It makes sense, then, that diversifying through both active and passive investing would further benefit investors. This strategy allows investors to grow their investments in passive funds while taking more risks with active strategies that take more energy and time.

To have all active assets means a lot of leg work, and you’re limited by the amount of time and energy you can dedicate. Similarly, passive investments restrict your ability to grow capital quickly as they generally require patience and time and/or involve a fund manager. A bit of both passive investment and active investment together creates the sweet spot.

 

How to blend active and passive investments

1. Create a strong foundation.

Passive investments create a strong foundation for long-term success when we look at markets over the long term. Passive investments can provide great returns if you have the time to set it and forget it in most cases. Look at the value of your home or how the S&P500 ETF has performed over time. Sure, there will be dips in the market, but these forms of passive investments create a reliable foundation for your portfolio over time.

 

2. Look at the areas where a passive strategy CANNOT outperform an active one.

There are some situations where the benchmark for a passive fund doesn’t outperform the potential returns of an active one. In these situations, an active strategy may be the best option for growth. Keep in mind that active strategies often involve more fees. Active day trading means paying a fee any time you make a trade (buy or sell stock). These fees may make the active strategy more costly and reduce the potential revenue return, making a passive strategy a better option despite lower returns on the benchmark.  

 

3. Stay up-to-date and active.

Even with passive funds, annual reviews are essential. More frequent checks and buying/selling are crucial to success with an active investment — they aren’t a “set-it-and-forget-it” strategy. To be successful in active investing, you need to be well informed on world news, economics, and the markets to understand what is coming. 

 

4. Know your goals.

If you’re trying to grow your investment quickly, are willing to take more considerable risks, and have the time to dedicate to active buying and selling or investment management, then a heavily weighted active strategy is right for your portfolio. A more long-term, reliable, and passive approach will be better if you’re saving for retirement. Understanding your goals for your money will drastically dictate what percentage of your portfolio is dedicated towards passive or active investment strategies. 

The trick to mixing active and passive investment strategies is to know your goals and risk tolerance. If your portfolio is more heavily weighted in active investments, such as active day-trading, it means higher risk and more work on your end. On the other end of the spectrum, a portfolio more focused on passive investments implies the potential for less rapid growth and more patience required to see the benefits over time. However, when we look at how the super-wealthy invest their money, remember that they will always have about 10% in cash and a higher percentage in long-term investments, which are generally more passive. 

 

Mortgage Pools are considered a more passive form of investing. However, the benefit of this form of pooled investment is the significant growth potential with a shorter commitment term. Unlike investing in the S&P 500, where you start to see growth over a longer period, investors in a mortgage pool through a MIC can begin to see growth right away and are generally only locked into a period ranging from one to five years. To learn more about Cooper Pacific and our mortgage funds, get in touch with Jordan on our team today.