• Skip to primary navigation
  • Skip to main content
  • Skip to footer

Wrenne Financial

Schedule an introductory call For clients

  • YOUR EXPERIENCE
    • Our Services
    • Our Process
  • Fees
  • Case studies
    • Meet the Vamadevans – In Practice
    • Meet the Maxwells
      – In Training
    • Meet the Schmitts
      – In Transition
  • Our Team
  • FAQs
  • Blog
Active Vs. Passive Investing

November 1, 2016 by Daniel Wrenne

Active vs. Passive Investing

This is a guest post from Miranda Marquit, a financial journalist. She writes for a number of publications about subjects related to money. You can read more of her writing at PlantingMoneySeeds.com.

One of the best ways to build wealth over time is to invest. The earlier you begin investing, the longer compound interest will work on your behalf, and the more time you’ll have to recover from mistakes and market downturns.

When you start investing, it’s important to understand the difference between active and passive investing. Being able to know what works best for you is the first step to making better decisions for you and your money.

What is Active Investing?

Active investing mainly deals with investments that you have to monitor regularly in order to stay on top of the situation. Day trading is a type of active investing that requires your attention. Active investing involves making regular trades and paying attention to when you want to buy and sell an asset. Other types of active trading can include options trading and forex trading. Active trading is usually characterized by an interest in picking the “right” investments, knowing when to buy them, and knowing when to sell them (in the hopes of making a profit). While active trading can be profitable when done well, there are pitfalls involved:

  • Market timing can be difficult, and you might be more likely to buy high and sell at a loss.
  • In some cases, active trading accounts can cost more because you have to pay transaction fees more often.
  • It can be tempting to make up for a series of active trading losses by looking for one “big score” – and some investors borrow to try and make it happen.

In many cases, active investing doesn’t make a lot of sense, especially when you are young and starting out. Active investing requires a certain degree of knowledge, as well as discipline. It can make more sense to start out with a more passive approach to investing when you are young and have limited resources.

Using Passive Investing Techniques

Passive investing, on the other hand, requires that you take a more laid back approach to investing. With passive investing you focus more on asset allocation and making regular contributions to an investment account. The idea behind passive investing is to take a more “set it and forget it” approach to build wealth over time by focusing on the long term.

One of the best ways to get started with passive investing is to use dollar-cost averaging to invest in index mutual funds or index ETFs. Rather than trying to pick the “right” individual stocks, you invest in a group of securities that have similar characteristics. It’s even possible to invest in an all-market index fund that follows the performance of the market a whole, so the performance of individual stocks isn’t as important.

With this type of passive investing, you determine how much you can set aside each month and you invest that regularly in a fund of your choosing. Your monthly contribution buys shares of the fund and continues to grow over time. In many cases, fees are low, as are transaction costs, so your expenses aren’t eating into your real returns.

It’s also possible to get help from a financial advisor to help you set up an allocation so that some of your monthly investment goes to stocks index funds and some goes to bond index funds so you have a degree of diversity. Once you have your allocation set up, you are pretty much on automatic as your money is withdrawn from your account each month and invested according to your plan.

Over time, you can experience increased growth in your portfolio if you choose index funds that pay dividends and automatically reinvest them. This passive approach isn’t as exciting, but you have a better chance of building your nest egg consistently over time.

As you consider which style works best for you, evaluate how much time you have to spend worrying about trading, and how much you can afford to lose. In many cases, the passive works better to save money, and to avoid emotion-fueled losses.

Share this post:
  • Facebook
  • Pinterest
  • Twitter
  • Linkedin

Reach out to us

admin@wrennefinancial.com

859-538-6044

Follow us dashicons-facebook-alt dashicons-linkedin

996 E New Circle Rd, Unit #270
Lexington, KY 40505

Doctors, do you know your financial vitals?

Enroll in our vitals check series to begin uncovering what yours are today.

Privacy Policy  |  Web Accessibility  |  Site Map  |  Form CRS  |  Disclosures

Copyright © 2025 Wrenne Financial. All rights reserved. Designed by Tinyfrog Technologies.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.

Wrenne Financial Planning LLC (“WFP”) is a registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. All written content on this site is for information purposes only. Opinions expressed herein are solely those of WFP, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.