Investment Strategy 101: Is Active Investing Worth It?

What is active investing?

When I graduated from UCT I decided to dabble in investments and invested in the Ghana Stock Exchange. 

I’ve since sold almost all those shares except for one in a mining company (or maybe it's cocoa, I'm not sure).

I’ve had those shares for 13 years. I sold the other shares to pay for my living expenses when I was doing my MBA.

I wish I'd invested in several indexes but I was straight out of varsity and busy piling on debt.

Investing in indexes would've been less risky and would've yielded higher returns than active investing because when we employ a passive investing strategy we’re investing in the market.

When we employ an active investment strategy we’re betting against the market and trying to beat the market by choosing our own shares to invest in.
 

So how do we choose shares to invest in?

 

We can choose what shares to invest in by using any of the strategies we discussed in the previous weeks: value investing, growth investing, technical analysis etc.

Most financial services companies employ an active investment strategy. They actively trade shares (buying and selling shares on a daily or monthly basis), in an attempt to take advantage of national and international events, beat the market and make a tidy profit. 

 

What are some of the disadvantages of active investing?

 

Disclaimer: I’m not a fan of constantly buying and selling shares so I’m biased and see too many disadvantages with this investment strategy.

Research has constantly shown that active investing doesn’t yield higher returns than passive investing; we lose money in the long run because of trading costs. 

Compared to passive investing, where you invest in an index or ETF, with active investing you’re investing in one share, which increases your exposure to risk when the market does badly. 

 

Advantages of an active investment strategy

 

When you employ an active investing strategy, you get to choose what shares you want to invest in, unlike an index, where the shares and the weightings have already been chosen for you.

And just like a passive investing strategy mitigates risk, an active investment strategy mitigates return – if your one share happens to do well, you can make a fortune.

If you’ve invested in an index and one share does well whilst the other shares do badly, then your return on investment also drops.

 

Would you or do you actively trade shares in the stock market?

Anyway let me know your thoughts.