How to Start Investing: Active vs Passive Investing for Beginners

Starting something new is always a multi-faceted experience. On the one hand, maybe you’re excited to finally be writing that book, moving across the country, or starting that new fitness routine that you’ve been thinking about for months. But there’s also a fear factor involved when starting something new, a feeling that can actually cause you to scrap your plans and forget about your long-awaited venture at the first feeling of uncertainty. 

Learning how to invest is no different. You’ve still got that new investor energy that’s keeping you all jazzed up to buy new investments and show the stock market what you’re made of. But I’m guessing there’s also some fear mingling in there with your excitement as you wonder if you’ve really got what it takes to be a smart, savvy investor. 

Newsflash: you’ve already got exactly what you need to succeed in the stock market. Because one thing a lot of newcomers don’t understand about investing is that there’s no perfect formula for success. It’s all about understanding your investing style, playing to your strengths, and developing some of that good old emotional intelligence. 

The initial steps to start investing involve knowing where you currently are, knowing yourself, and starting from there. As you grow as an investor and gain more experience, your investing style will likely also evolve.

The very first step to becoming a successful investor is to consider your current lifestyle and determine your own personal investment style. This will help you to figure out how hands-on you would like to be with your investments and where you should go first to get your portfolio off the ground. 

Here are three general approaches to investing and the lowdown on what each one involves:

1. Passive investing

Passive investing is a hands-off investing style. You do some work at the beginning researching various index-type investments before choosing the ones you want and placing trades to buy those positions. After that, it’s pretty much a hands-free model as you’re buying and holding these initial investments long term.

This investment style can be considered a little boring because there’s not all that much action on your part. With passive investing, you only invest in index funds or ETFs that track an index, like the S&P 500, and not individual stocks. That way you don’t have to pay much attention to what’s going on in your account or the stock market, as diversification is naturally built into your investments. In this model, you’re generally investing regularly on a monthly or quarterly basis with set amounts that don’t increase or decrease unless you want them to. 

Passive investing is ideal for people who don’t like constantly checking in on their portfolio other than for the occasional rebalance to realign a portfolio with their risk tolerance. 

So, if you’re a “sit back and relax and let your money work for you,” sort of investor, the passive strategy is definitely for you! 

2. Active investing

The active investing model is what most people imagine when they think of investing. It’s a more action-packed style in which you’re involved in the buying, selling, and monitoring of individual stocks on a regular basis. With active investing, you get to be really hands-on with your investment portfolio. This is generally ideal for more practiced investors who enjoy crafting their own diversified stock portfolios and dedicating time to researching investment options. It’s also for those who like to have individual stocks in their portfolio in addition to index funds and ETFs. No matter what an active investor pads their portfolio with, they’re actively paying attention to each individual stocks in their portfolio depending on their investment objective with each stock. 

If you’re a DIY money manager who wants a hand in every stock decision and you love spending your free time and energy studying stocks and the market, active investing is for you. 

3. Automatic investing 

Automatic investing is the newest investing style on the scene. It is a subset of passive investing that involves handing over your investment portfolio, money, and decision-making powers to an automated force (a computer/robot). Investing through a robo-advisor allows you to be absolutely 150% hands-off with your investing. There’s no index investment research like in normal passive investing. You simply answer some questions about your investing goals and risk tolerance and the robo-advisor will choose an index portfolio mix for you. In this style, there’s no choosing investments or placing trades -- you just let the computer program match your portfolio to your preferences and personal investing goals and automate the amount you want transferred from your bank account each month. And that’s it! All done. No need to monitor your portfolio or spend hours researching. Instead, you’ve got a curated and personalized stock portfolio already set up and working for you. 

If you’re the super busy type or someone who gets overwhelmed by the thought of research and numbers and analytics and all that jazz, automatic investing might be the perfect style for you. It takes the stress out of investing and gives you more time to spend on the people and things you love while your money works for you. 

Now that you’ve read through all the different investment styles, I want to stress something super important: there is no correct investment style and you’re not locked into one investing style forever.

Active investing is not going to give you a leg up on the stock market just because you’re more involved in the stock selection and trading process. Similarly, automatic investing can’t guarantee a flawless portfolio just because a robot is doing it. Each investment style has its advantages and disadvantages, but the important thing to remember is that you should invest based on your personal style. Don’t worry about how the big Wall Street boys are doing it or how the top investors handle their portfolios. You just choose the style that’s right for you. 

Maybe after reading about the investment types you’re totally positive which style you should go for based on your lifestyle, personality, and comfort with money management. Or maybe you’re torn between two and have no idea how to determine which one is truly best for you. 

No need to stress - I have something that can help. As a money expert, I’ve worked with various personalities and have a great understanding of people’s wants and needs based on their money personality, that is their style of spending, saving, or investing money. 

If you’d like to learn more about your general money personality, I’ve created a fun money quiz to help you identify which of the 4 money personalities you identify most with. This can help you figure out what investing strategy is going to end up being best for you. That way you can head out into the great big world of investing with the confidence and self-knowledge you need to make the smartest money moves for you. 

Psst... looking for a little more guidance on how to start investing, investment account options, and balancing your portfolio? Check out my course, Straight Up Investing!