A Millennial's Perspective On Passive Vs. Active Investing
Apr 23, 2015
There's a lot of debate in the finance industry over what the best investment strategy is to achieve long term financial success. There are many investors out there who are adamant that passive investing is the best choice, while others (like us), think that active investing is the best route.
For those of you that aren't as familiar with these terms, here are some basic definitions:
Passive investing - limited buying and selling of securities that allow for long-term investing (ETFs, index funds, stock, etc.). Investors who fall in this category generally do not buy or sell very often and their focus is on finding long-term securities to invest in
Active investing - ongoing opening and closing of different types of investments with constant oversight. This type of investor usually uses securities like options or futures and is continuously monitoring the market for more opportunities.
If you have been following tastytrade for even a short period of time, you have probably realized that we fall into the active investor camp and advocate for others to do so as well.
What we have come to realize is that financial literacy is at the heart of the active vs. passive investing debate and that the real reason that people do not manage their own money isn't because they are not capable, it's that there are not many great resources out there helping them to find their way. Therefore, most people tend to hand their money over to the people who they consider "professionals."
As part of the active investor camp, I always find it shocking how little most people know about managing their finances. Any time I broach the topic with friends, family, or coworkers, it typically goes a little something like this...
After a busy workday one particular Friday, I sat down with the developers in my office, chatting with them about their personal lives, and somehow the topic of trading conversation came up (as it usually tends to do with me).
Everyone at my office knows that I have recently gotten into options trading, and they always wonder why. At my age, they think I should be more focused on going out and having fun!
One of my coworkers started explaining that he had no idea what to do with his money. He's a 24-year-old man, extremely intelligent, a developer for a major software company, solves Rubik’s Cubes and makes elaborate origami creations. It's clear he has plenty of knowledge in many areas, but he told me is clueless on how to handle his money. He puts all of it into savings accounts and hasn’t even bought mutual funds. He feels paralyzed, and is worried that he doesn’t know enough about investing, so he is afraid to even try it.
The other people in the conversation felt pretty much the same way. They are so overwhelmed that a lot of them end up finding a financial advisor and giving up all control of their money to this stranger.
Or they do what I did before I started options trading...buy mutual funds of some kind, and hope that the miracles of compound interest give them a bountiful return on their unhedged positions.
This is one of the reasons I am so excited to be part of tastytrade’s journey to teach everyone how to manage their own money. As a millennial too, I know what a lot of my friends do with their money...and therefore, I know that we need help!
Each time I sit down with my Millennial friends to try and explain the advantages of active investing, they always change the subject. I hear a hundred excuses like these:
"I don’t know anything about money."
"Let’s talk about something less serious than money."
"I am not good at math."
"This all sounds too complicated."
"I don’t have thousands of dollars to invest."
As an active investor, this pains me. It's frustrating because I know that people choose passive investing because they lack domain knowledge, not because they are lazy.
This battle between passive and active investing is why I tell everyone about tastytrade. I want all of my Millennial friends to learn about money and how to manage it. The sense of freedom and power that I have now because I know that I can manage my own money makes me feel so self-reliant. I know now that I never have to depend on another stranger to manage my money.
In a Market Measures episode earlier this year, Tom & Tony spoke about how the buy-and-hold strategy (passive investing) is inferior to the active method of investing. The research team discovered that the best-performing strategy since 2000 was selling the cash-secured put. To be clear, the cash-secured put involved writing an at-the-money put in the S&P 500, while setting aside the money that would be used to buy the S&P 500, into buying T-bills (treasury bills).
If you are a skeptic of active investing, you should check out one of our latest series - Truth or Skepticism (featuring Dylan Ratigan). Truth or Skepticism is a great series that sheds some light on the industry debate. It provides two completely different perspectives from the most reputable figures in the industry. Dylan plays the skeptic of active investing as Tom explains to Dylan why we trade the way that we trade.
Here is the first video in the series for you to check out!
You can view all of the Truth or Skepticism episodes here.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
May 6, 2016
Earning a certain average profit per month by selling premium is something of interest to many investors and traders. Until now, no one knew how much extrinsic premium needed to be sold to generate a targeted average monthly profit. We’re about to change that.
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