For investors excited about staying engaged in the market, active investing is a strategy true to its name: Investors frequently buy and sell stocks, trying to time their moves so their investment may grow at a higher rate than that of the broader stock market. It’s a more volatile and potentially risky strategy, but when executed successfully, it also comes with greater potential growth.

What is an active investing strategy?

Put simply, an active investing strategy is one that follows a buy-and-sell model. In that sense it’s the philosophical opposite of passive investing, which is a buy-and-hold strategy. Passive investors purchase assets—like stocks, market index funds that track the S&P 500, mutual funds, or other managed funds—and hold onto them for the long term in pursuit of potentially slower but steadier growth.

What to consider when choosing an active investing strategy

Personal goals, risk tolerance, and appetite for making investment decisions all come into play when considering an active investing strategy.

• Financial goals and time horizon.

  Investors looking for large short-term gains—for example, to purchase a second home as an investment property—may find an active strategy appealing, with its potential for rapid portfolio growth, despite the potential for risk. Those planning for a far-off life change, by contrast, such as retirement or a young child’s college fund, may feel more comfortable with the passive, long-haul approach given their extended timeline.

• Risk tolerance.

  Some investors may loathe the thought of missing out on a short-term opportunity for growth and love staying on top of market trends. Others can’t stomach the risk of trying to time the market, preferring a slow-and-steady approach that tends to be much less volatile—even as the potential for growth may be more limited.‍

• Appetite for making investment decisions.

  Some investors may choose to actively manage their own portfolios, but many work with an expert: an investment advisor or wealth management team who can assess goals, advise on various types of active investment strategies, and invest and rebalance assets as needed.

Active investing vs. passive investing

When considering passive vs. active strategies, both approaches have advantages and limitations.

Advantages of active investing

Investors may choose an active investing strategy if they’re confident in their—or their portfolio manager’s—ability to stay abreast of market conditions and to shift their investments to take advantage of potential opportunities.

1. Option to act quickly.

   Active investors can respond more immediately to market shifts and move money around quickly to try to make more profit in a shorter period.

2. More room for customization.

   Active investors have the flexibility to create portfolios that are highly customized to their interests and goals. Want to explore cryptocurrencies or tech stocks? Go ahead and plunk some money there. Think there’s an opportunity in a stock that most of the market is missing? Buy up shares and be prepared to sell if the hunch is right.

Disadvantages of active investing

Active investing does have some limitations.

1. Requires high engagement.

   Investors stay educated on day-to-day shifts so they don’t miss a big opportunity.

2. More volatility.

   All of that potential for greater, quicker profit also comes with greater risk. That buzzy startup might take a dive after a downbeat financial report, or an entire sector might drop based on new government regulations. With so many bets, active investors surely won’t be correct every time.

3. Potentially higher cost.

   Because active investing involves a lot of transactions, paying fees and commissions on each purchase can add up quickly. With actively managed funds, investors often must pay a percentage of their assets under management as a fee to the investment manager, regardless of performance, and some managers also charge fees based on a percentage of profits made. Active investing can also come with a potentially higher tax bill if the investor is buying and selling securities within the same year.

Advantages of passive investing

Among the advantages of passive investing is its comparative steadiness.

1. Requires no day-to-day commitment.

   Passive investors pick their stocks, index funds, mutual funds, or other assets with the intention of sticking with them over time—possibly for many years.

2. Presents less risk.

   Because this approach doesn’t involve frequent changes to try to time the market, passive investing tends to be less risky and volatile than active investing. And though success isn’t guaranteed, studies show that over the long term, active investment returns lag behind passive investment benchmarks: The average stock market return is an inflation-adjusted 7% a year.

3. Lower fees.

   The costs of passively managed index funds are quite low, with fees that are on average much less than that of active investing.

Disadvantages of passive investing

The steady and long-term nature of passive investing presents potential investment limitations.

1. Potential for missed opportunities.

   Investors may miss out on opportunities for quick and rapid gains in their portfolio, with money remaining in assets like index funds while, for example, the tech sector is on a tear.

2. Requires a long view.

   Investors have to be OK with keeping their money where it is for the long haul: While passive investments tend to win over active in the long term, they may lag the market in the short term. ‍

3. Less room for customization.

   Although it’s possible to select passive investments based on broad preferences and goals, the strategy doesn’t offer the same level of direct customization as active investing.

Is a mix of passive and aggressive investing strategies possible?

Absolutely. There’s no rule about choosing one over the other. In fact, combining both strategies may diversify a portfolio as well as address goals with multiple timelines. After all, most people have both short- and long-term plans.

For example, some investors may opt to put their retirement savings in passive investments like mutual funds, and save a portion of their money for active investments like buying shares of upstart companies in a hot field where they believe there is opportunity for quicker gains.

The bottom line

Active investing is a buy-and-sell strategy in which investors take frequent action—like buying shares of a buzzy company—in a bid to achieve growth greater than that of the broader market in the short term. Passive investors put their money in steadier investments like an S&P 500 index fund, holding onto them for the long term with the goal of slow, yet more stable, growth.

When deciding on investment approaches, investors can consider factors including the timeline of their financial goals, their ability to tolerate risk and volatility, and whether they want to take frequent or infrequent action with their portfolio.