Different Schools of Thought on Investing

Started a new job? Excited to see all that money in your bank account but have nothing else to do with it? Why not put it in a brokerage account? We all know that in a low interest rate environment that it doesn’t make sense to put a significant amount of money in a savings account which may only yield 0.10% or in a CD which locks up your money with no illiquidity premium. Thus, you may be wondering what should I buy with a brokerage account and where to park your hard-earned cash in. Well, this article is going to answer that question. In the investing world, there are mainly two schools of thought.

  • Passive investing
  • Active investing

Let’s go over which one is right for you. Let’s go over Mundane Molly. She just graduated out of college and is starting her lucrative consulting career. Because of the long hours she works and the lack of time or interest to learn about investing, all she wants to do is buy index funds and let the portfolio accumulate returns until her retirement. If you’re interested in this method, check out my other article here. This avenue of investing is called passive investing, meaning that you just buy several index funds at the beginning and periodically deposit money with little involvement besides balancing the portfolio annually. In fact, robo advisors already do the balancing in exchange for a fee so passive investing is really hands-off. Don’t expect crazy returns with this method in a short time frame; passive investing is for those who are in it for the long haul and let compounding interest work in their favor. Returns of at least 5% are ideal for a passive portfolio. If you’re not a fan of the fees robo advisors typically charge but still want a passive portfolio, check out my other article on how to build it.

Now let’s look at Crazy Cait. She also just graduated out of college like Mundane Molly and is starting her career at a hedge fund as an analyst. Because Crazy Cait loves finance so much and can’t seem to leave her work at the office, she opened up a brokerage account to trade in her free time. Now Cait is a little crazy, so she doesn’t touch index or mutual funds and wants to pick her own stocks. Her work already involves her keeping up with the markets so she is comfortable picking and buying stocks. Additionally, she uses options to craft unique trading strategies depending on which way the markets move. Thus, she is what we consider an active investor. If this sounds like you, check out this article. Additionally, for you crazy b!&ches out there playing with options, this may be for you.

Typically, hedge funds have underperformed our recent bull market. In fact, Investopedia has deemed it the “Great Exodus Out of Hedge Funds” and the investment management industry faces fee compression as more investors flock toward passive investing. These days, only 15% of stocks are picked by humans compared to 45% in the late 1990s while the rest are either passive in an index fund or managed by computer through quantitative trading. It is extremely difficult to time the market and even more so to outperform in a historically bull market. Thus, if you’re a beginner who does not want loss of capital, stick to index funds and let the crazies do the rest. 🙂

If you would like a thorough and personal review of your investing strategies, feel free to contact us and don’t hesitate to comment below for general inquiries.

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