If you’re thinking about investing, one of the first questions that might come up is which approach is right for you. You’ve probably heard stories of people making quick gains through active investing, while others are steadily growing their wealth over time through passive investing. But what exactly do these methods mean, and how do they work? Here’s a simple breakdown to help you understand the difference.
What’s active investing?
Active investing is often what comes to mind when people think about investing — day trading or traders who are constantly studying the market to figure out their next move. A lot of these decisions happen fast and pretty often. People who do active investing usually know the market really well (or hire a fund manager that does), but it also takes a lot of time and effort. These are investors willing to trade in more risk and cost for the chance at a higher return.
Pros and cons of active investing
Pros
- Potential for higher returns: Since you’re actively making moves based on research and trends, there’s a chance to beat the market and earn more than average.
- More control: You decide exactly which stocks to buy or sell and when, giving you flexibility to act on opportunities.
- Fast-paced and hands-on: This approach can be exciting for people who like staying plugged into the market.
Cons
- Time- and energy-intensive: It requires constant attention, research and quick decision-making, which can be overwhelming for some.
- Higher costs: Frequent trading can mean more fees and taxes that eat into your earnings.
- More emotional swings: Because you’re watching the market closely, ups and downs can feel more intense.
What’s passive investing?
Unlike active investing, passive investing is a more hands-off approach that focuses on long-term wealth building. This is typically done by buying into index funds, which let you invest in a large group of companies all at once. For example, if you buy an index fund that follows the S&P 500, your money is spread across some of the biggest companies in the U.S. So, instead of trying to pick which single stock will do well, you’re investing in the overall market’s performance. These are long-term investors who appreciate simplicity and want to diversify their investments at a low cost.
Many passive investors turn to robo-advisors, software platforms that use computer algorithms and data to invest on their behalf. Betterment and Wealthfront are two popular robo-advisors that build your investment strategy based on your risk tolerance.
Betterment
-
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. For example, Betterment doesn’t require clients to maintain a minimum investment account balance, but there is a ACH deposit minimum of $10. Premium Investing requires a $100,000 minimum balance.
-
Fees
Fees may vary depending on the investment vehicle selected, account balances, etc. Click here for details.
-
Investment vehicles
-
Investment options
Stocks, bonds, ETFs and cash
-
Educational resources
Betterment offers retirement and other education materials
Terms apply. Does not apply to crypto asset portfolios.
Pros
- No trade or transfer fees
- Good for automated investing
- Customizes users’ portfolios around their financial goals, timeline and risk tolerance
- Users can assign specific investing goals (short- and long-term) to each portfolio and invest using different strategies (less and more risk)
- Quick and easy to set up account
- Able to sync external retirement accounts to your Betterment retirement goal so all your accounts are in one place. Premium plan users get unlimited access to a financial advisor (otherwise, one-time advisor consultations cost a fee ranging from $299 to $399)
- Advanced features include automatic rebalancing, tax-saving strategies and socially responsible investing
Cons
- Base price for investing accounts is $4/month – recurring monthly deposits totaling $250, or total Betterment account balances reaching $20,000, automatically switch you to an annual price of .25% of your investing account balances
- Premium plan requires $100,000 minimum balance
Wealthfront
-
Minimum deposit and balance
Minimum deposit and balance requirements may vary depending on the investment vehicle selected. $500 minimum deposit for investment accounts
-
Fees
Fees may vary depending on the investment vehicle selected. Zero account, transfer, trading or commission fees (fund ratios may apply). Wealthfront annual management advisory fee is 0.25% of your account balance
-
Bonus
Get $30 bonus when you fund your first taxable investment account
-
Investment vehicles
-
Investment options
Stocks, bonds, ETFs and cash. Additional asset classes to your portfolio include real estate, natural resources and dividend stocks
-
Educational resources
Offers free financial advice for college planning, retirement and homebuying
Pros
- No trade or transfer fees
- Good for automated investing
- Picks investments based on user’s risk tolerance and time until retirement
- Offers a cash management checking account with a debit card
- Tax-loss harvesting to reduce the taxes you pay:
- Fund your first taxable Investment Account and get a $50 bonus.
Cons
- $500 minimum deposit
- 0.25% management fee
Pros and cons of passive investing
Pros
- Easier for beginners: You don’t need to be a market expert. Once you invest, you can leave your funds alone and let the market do its thing.
- Lower costs: Since there’s less trading, you save on fees and taxes, which can make a big difference in the long run.
- Built-in diversification: Index funds spread your money across many companies, lowering the risk that comes with relying on just one or two stocks.
Cons
- Less control: You can’t pick or adjust individual stocks within an index fund.
- Slow and steady: This strategy can feel boring to people who want a more active role, and your investments will still rise and fall with the market.
- Market-matching, not beating: Your returns will generally follow the market’s performance, not surpass it.
Investing FAQs
What’s an example of a passive investor?
A passive investor can be someone who puts their money into index funds or ETFs that track the overall market, then leaves those investments to grow over time without making frequent changes.
What are examples of active investments?
Active investments can include individual stocks, options or mutual funds, often managed by professionals who aim to outperform the market through research and timing.
Is active investing worth it?
Active investing can be worth it, but it depends on your time, knowledge and risk tolerance. While some people may see higher returns, others find passive investing a simpler and more reliable long-term strategy.
Subscribe to the CNBC Select Newsletter!
Money matters — so make the most of it. Get expert tips, strategies, news and everything else you need to maximize your money, right to your inbox. Sign up here.
Why trust CNBC Select?
At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every investing article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of investment products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.
Catch up on CNBC Select’s in-depth coverage of credit cards, banking and money, and follow us on TikTok, Facebook, Instagram and Twitter to stay up to date.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
