Active vs passive isn’t an all-or-nothing decision. Learn the real tradeoffs—costs, taxes, flexibility—and how to choose an approach that fits.
The debate in one sentence
Active investing aims to beat a benchmark. Passive investing aims to match a benchmark while minimizing costs that can reduce net returns.
Why passive investing stays popular
Indexing can create cost efficiencies: less research-driven security selection, less trading, often lower trading costs, and potentially fewer capital gains distributions (tax efficiency).
But there’s an important clarification: indexing is not the same as investing directly in an index, which cannot be done.
Why active management can still be useful
Active management can offer flexibility—tilting toward sectors, managing overall risk (for example, temporarily increasing cash alternatives), and incorporating tax considerations like loss harvesting.
The tradeoff is cost. Higher expense ratios and more frequent trading can reduce net returns over time.
The most overlooked step: read the prospectus
Before investing in any active or passive fund, carefully consider the investment objectives, risks, charges, and expenses found in the prospectus.
If your advisor is recommending a specific product, this is part of doing the homework—not optional paperwork.
Disclosure: This material is for general informational purposes only and is not a recommendation to buy or sell any security. All investing involves risk, including possible loss of principal.