Portfolio management is a key element of successful investing. There are two basic approaches, each with its own pros and cons. Every investor needs to decide whether to choose an active or passive approach to managing their investments.
Both strategies have advantages and disadvantages, and their suitability depends on investment goals, risk tolerance and other factors. Let’s take a closer look to find out which strategies might be suitable for different types of investors.
Difference between active and passive portfolio management
Active and passive portfolio management differ fundamentally in their approach to investing and risk management. Active management aims to outperform the market through frequent trading, market analysis and seeking opportunities to achieve higher returns. However, this comes with higher management costs and increased risk. In contrast, passive management tracks market indices and is characterised by lower costs, stability and simplicity. The goal is to achieve returns corresponding to the overall market without attempting to outperform it.
The choice between these approaches depends on investment goals, time horizon and risk tolerance. Active management is suitable for investors looking for dynamic returns and willing to bear higher risk, while passive management attracts those who prefer long-term stability and lower costs. A combination of both strategies can be a reasonable option for achieving a balanced portfolio.
Active portfolio management
What is active portfolio management?
Active portfolio management means that the manager tries to outperform the market through active buying and selling of assets. This approach involves market analysis, selecting individual securities and strategic reallocation of assets. Fund managers or investment managers aim to spot opportunities and take advantage of market anomalies to generate higher returns. One of the major advantages of active portfolio management is the potential to profit even during market downturns.
Example of active management in practice
Imagine an active management strategy in a fund focused on technology stocks. The fund manager monitors current market developments, analyses financial reports of individual companies and assesses potential risks. Based on this data, they decide to increase exposure to a company that has just launched an innovative product and reported revenue growth. At the same time, they may reduce positions in less promising stocks that show signs of stagnation or decline.
Active management in the cryptocurrency market
In a cryptocurrency fund, active management may involve algorithmic trading and tracking current market trends. The fund manager analyses market sentiment, technical indicators and news from the cryptocurrency space to identify potential opportunities and risks. For example, during a sharp rise in the price of bitcoin, the manager might increase the share of riskier altcoins with higher profit potential. Conversely, when the market declines, the portfolio may be diversified into stablecoins or less volatile assets to minimise losses.
Such active management of a cryptocurrency portfolio allows quick adaptation to current conditions, which can lead to higher returns – but at the cost of higher volatility and risk, typical for the crypto market.
Advantages of active portfolio management:
Potential for higher returns: active managers aim to identify undervalued assets and maximise profit.
Flexibility: able to react quickly to market changes and adapt to current conditions.
Hedging opportunities: active management allows the use of hedging strategies to reduce risk.
Professional approach: experienced fund managers have access to detailed analyses and data.
Disadvantages of active portfolio management:
Higher costs: active funds usually have higher fees due to management and trading costs.
Risk of poor decisions: even professionals can make mistakes and choose an inappropriate strategy.
Emotional and stressful: active management requires constant market monitoring and quick decision-making, which can lead to emotional pressure and rash decisions.
Passive portfolio management
What is passive portfolio management?
Passive portfolio management focuses on tracking the market rather than trying to outperform it. Investors often use index funds or ETFs that track a specific index (e.g. S&P 500). This strategy is based on the idea that long-term market gains are difficult to beat, so it is better to simply follow the market's progress.
Advantages of passive portfolio management:
Lower costs: management fees are significantly lower than those of active funds.
Stability: passive strategies minimise fluctuations caused by poor investment decisions.
Tax efficiency: fewer transactions mean lower tax burdens.
Simplicity: investors do not need to monitor the market or conduct complex analyses.
Disadvantages of passive portfolio management:
Limited return potential: passive management never outperforms the market, it only mirrors it.
Lack of flexibility: it cannot react to short-term market opportunities.
High market exposure: when the market falls, passive funds fall along with it.
Which approach to choose?
Choosing between active and passive management depends on your financial goals, time horizon and risk tolerance. Active management can be suitable for investors seeking higher returns and willing to bear higher risk, while passive management is ideal for those who prefer long-term stability and lower costs.
A combination of both approaches can also be a reasonable choice, offering the benefits of both worlds. For example, using a passive core portfolio with actively managed supplementary positions can provide an optimal balance between risk and return.
Whichever approach you choose, it is important to regularly review your portfolio and adapt it to changing market conditions and personal goals.
Earnio: Passive investment with an active approach
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How does it work?
Earnio combines algorithmic trading with expert analysis, monitoring current market trends and optimising portfolio composition. The platform can quickly adapt to changing market conditions and seek opportunities to maximise returns.
Worry-free: the platform takes care of everything – you just enjoy the results.
Dynamics and stability: active management behind the scenes, passive approach for the user.
Long-term experience: a team with almost 10 years of experience in crypto trading.
FAQ: Most frequently asked questions about active and passive portfolio management
What is passive portfolio management?
Passive management means investing with the goal of tracking market indices without attempting to outperform the market. Investors typically use index funds or ETFs that track a specific market (e.g. S&P 500). The advantages include low costs, simplicity and long-term stability, as there is no need for active trading.
What is active portfolio management?
Active management aims to outperform the market by actively buying and selling assets. Managers rely on analysis, market trends and predictions to identify investment opportunities. This approach requires frequent trading and quick responses to market changes, which brings higher costs and risks but also the potential for higher returns.
Which strategy is better – active or passive management?
It depends on investment goals and risk tolerance:
Passive management is suitable for long-term investors who prefer stability and lower costs.
Active management suits investors looking for higher returns and willing to take on more risk.
What are the advantages of passive management?
Lower management and trading costs.
Stability through market tracking.
Simplicity – no need for active market monitoring.
Tax efficiency – fewer transactions mean lower tax burdens.
What are the disadvantages of passive management?
Limited return potential – it never outperforms the market.
Lack of flexibility – it does not react to short-term opportunities.
High market exposure – when the market falls, the investment falls as well.
What are the advantages of active management?
Potential for higher returns with the right strategy.
Flexibility and quick reactions to market changes.
Hedging against losses through the use of hedging strategies.
Professional approach with expert management teams.
What are the disadvantages of active management?
Higher management and trading costs.
Risk of poor decisions made by managers.
Stress and emotional pressure when monitoring market developments.
Is it possible to combine active and passive management?
Yes, combining both approaches can offer the best of both worlds. The core portfolio can be passive (stable part), while a smaller portion can be actively managed to take advantage of market opportunities.
How to choose between active and passive management?
Consider the following factors:
Investment goals – are you aiming for short-term profit or long-term stability?
Risk tolerance – are you willing to accept higher volatility?
Time horizon – how long do you plan to hold the investment?
Cost efficiency – are higher fees for active management justified?
