Discover the exciting alternative of active investing for an exceptionally thriving portfolio. Learn how this strategy combines the best of both worlds, allowing you to buy and sell investments at a frequency that suits your preferences. Take control of your portfolio and dive into the captivating world of active investing.
Looking for a new approach to investing that offers more excitement than the traditional buy-and-hold strategy? Discover active investing, a strategy that combines the best of both worlds, falling in between day trading and buy-and-hold investing. In this blog post, we delve into the concept of active investing, explaining how it allows you to buy and sell investments with a frequency that suits your preferences. Get ready to take control of your portfolio and explore the world of active investing.
Table of Contents
Some people tinker on their homes every weekend. Others open their toolbox only when a pipe bursts. Similarly, in investing, day traders may place trades as theyre glued to business news channels, while buy-and-hold retirement savers might check their accounts only a couple of times a year.
And then there’s the crowd of people who fall somewhere in the middle. They arent ready for the time and intensity day trading requires, but they itch to do more with their portfolio than follow reliable (if mundane) long-term investment strategies.
Does that ring true for you? Welcome to the world of active investing, where you buy and sell investments with some frequency, creating a definition of “active” (ranging from days to months) that works for you.
The following tips will help you transition to a life as an active investor — and offer some strategies to consider.
Become a sponge
Heres a secret you may already know: If you follow the advice of many experts and invest a majority (or all) of your investment portfolio in low-cost index funds, you dont really need to know much about how the stock market works. The market can be a fascinating beast to watch, but even Warren Buffett, one of the most successful investors in history, recently said hes had a “tough time” trying to beat the S&P 500.
With buy-and-hold investing, you dont have to “beat” the market because tracking the market is a tried-and-true method for success, with the S&P 500 delivering average annual returns of about 10% historically. But as you dial up the frequency of trading, you also increase the odds that some trades will go bust, so expect to spend more time keeping tabs on your portfolio.
The payoff? If you can mix the steady power of index funds with a few well-chosen individual stocks or niche funds (like those tracking small-cap or international markets), you might be able to nudge your returns higher than the broader market.
To get started:
1. Read up on the markets
When the market swings significantly higher or lower on any given day, theres generally a reason why. And it likely has something to do with the following: the pace of economic growth, how much money publicly traded companies are making or losing, what the Federal Reserve is doing or geopolitical events that could disrupt all the above. Keeping up with these events is key to active investing.
2. Take a test drive
If only you could practice trading new assets without actually putting money on the line, right? Great news: Some brokers have stock market simulators that allow you to mimic the trading experience without the risk. These practice accounts, sometimes referred to as paper trading, offer a safe space to test a new investment strategy or learn how a new-to-you asset trades.
Set your ground rules
Dont skip the endeavors above, even if youre hot to start trading more frequently, like, yesterday. Why? Because that time can provide valuable insight into whether youll succeed as an active investor. If you find it a slog to keep abreast of whats happening in the market or dont have the energy to play around with a virtual account, perhaps active investing isnt for you.
And thats totally fine. Some people are drawn to active investing for the prospect of making more money, but investing isnt the only way to earn a decent return these days. Weve compiled ideas for how to invest savings for short-term or long-term goals, including several that are very low-risk.
Here are some other things to consider:
1. Be realistic
How much time can you devote to dabbling in the market? If you have a grueling 9-to-5, dont undertake a strategy that adds more stress to your life.
2. Start small
You may picture day traders glued to multiple chart-filled screens, but many of these folks eased into that lifestyle. Perhaps your foray into active investing begins with buying one stock and grows from there. As with any bet thats more speculative, make sure youre investing money you can afford to lose.
3. Be mindful of taxes
Taxes are one of the biggest differences between buy-and-hold and active investing. Profits from the sale of assets held one year or less are subject to short-term capital gains taxes, which equal your ordinary income tax rate, currently as high as 37%. By comparison, assets held longer than a year have a maximum long-term capital gains tax rate of 20%.
4. Keep costs to a minimum
The amount you pay in trading costs can quickly add up, so it may be time to shop around for a broker that caters to active traders. One of our picks for the best brokers for day trading will fit the bill.
Select your investments
Of course, any active investing strategy requires investments. You could go in many directions; here are four ideas:
1. Stocks
Stocks are a natural fit for many people because they may already know a great deal about how particular companies make money and how their stocks trade. Most stocks (aside from penny stocks, for example) also trade frequently enough that youll be able to easily buy or sell within your specified time frame. Our guide on how to begin stock trading is a good starting place.
2. ETFs
Exchange-traded funds often are lumped alongside mutual funds as a good buy-and-hold strategy because they seek to track some segment of the overall market. But like stocks, the largest ETFs have sufficient liquidity that you can trade them often. Consult our guide on how to shop for ETFs.
3. Options
Options trading is a bit more complex than stock trading because you must make three strategic decisions: which direction you think an asset will move, how high or low the price will go and the time frame in which it will all happen. But you can also tie up less money, which may be appealing. Read more about how to trade options.
4. Futures
Similar to options, you can start trading futures without plopping down any money upfront. Thats because you agree to buy or sell an asset at a future date at an agreed-upon price. You can trade futures on individual stocks, ETFs, commodities, bonds or other obscure assets, though risks also are higher. Read our guide on how to start trading futures.
What’s next?
Looking for some timely ideas? Check out our roundup of investment strategies to consider for this quarter and beyond.
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NerdWallet rating
NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.
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NerdWallet rating
NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.
5.0/5 |
NerdWallet rating
NerdWallet’s ratings are determined by our editorial team. The scoring formula for online brokers and robo-advisors takes into account over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.
5.0 /5 |
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Promotion Get $100 when you open a new, eligible Fidelity account with $50 or more. Use code FIDELITY100. Limited time offer. Terms apply. |
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