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Optimal Wealth & Investments, Inc.

Active or Passive? Investor or Investments?

Passive & Active:  Difference between Investors & Investments

Types of Investors:

  • Passive Investor: 
    • Construct a portfolio, with intent to “buy & hold”, which is periodically rebalanced to targeted allocations.
    • A passive managed non-retirement account is generally more tax efficient compared to an actively managed account.
    • No risk management.  No action is taken to reduce risk to avoid losses in a declining market environment. 
    • Portfolio construction is based on the one's investment objective, risk tolerance, and risk capacity, without any consideration of analysis or economic condition.
    • Requires adherence to stated objective to “buy & hold”, without any consideration of analysis or economic condition. 
  • Active Investor: 
    • Initial investment allocation is weighted to asset classes that have perceived stronger investment merit, usually based on technical and/or fundamental metrics.
    • In general, portfolio is more frequently repositioned in response to various technical and/or fundamental changes in the capital markets to seek to enhance risk-adjusted returns.
    • Non-retirement accounts are generally less tax efficient with respect to capital gains.
    • Non-retirement accounts do have the advantage of utilizing tax loss harvesting to enhance their tax efficiency.
    • Primarily technical analysis is utilized to mitigate risk by holding investments perceived to be more favorable risk/reward profiles. Attempts to deploys risk management by owning investments with perceived favorable risk/reward profiles.

Types of Investments:

  • Passive Investments:
    • Investments track a particular index, owning the securities that comprise the underlying index tracked.
    • Management fees are generally lower, if not significantly lower, than actively managed mutual funds or exchange traded funds (ETFs).
    • Investment analysis or merit-based allocation of capital is not utilized.
    • Tax efficient if investments are in a non-retirement account.
    • Relative returns, less a small management cost.
    • Risk management is not utilized in passive investment.
  • Active Investments:
    • Investment selection process is based on portfolio managers and analysts analysis in selecting portfolio investments.
    • Management fees and friction costs can be high, if not significantly higher when compared to passively managed index oriented investments. 
    • For non-retirement accounts, actively managed investments (i.e. actively managed mutual funds), are significantly less tax efficient due to changes to the portfolio holdings and requirement to distribute net capital gains every year to shareholders.
    • Mutual funds and exchange traded funds have stated investment objectives which determine the type of securities the investment can purchase (i.e. Large Cap Growth US). 
    • Portfolio managers may implement risk management by owning less volatile investments or holding a larger cash position to help minimize a decline in a portfolio value.


So the question is:  are you an Active Investor?  If yes, then do you desire to invest in Passive or Active Investments (or combination of both)?  If no, then you are a Passive Investor, either in Passive or Active Investments (or combination of both).  At Optimal Wealth & Investments we have the competence, platform, and transparency to implement Active or Passive Investments, as an Active or Passive Investor. 

Adam Chaney

Certified Financial Planner, CFP®
Chartered Retirement Planning CounselorSM (CRPC®)
Accredited Portfolio Management AdvisorSM (APMA®) 

Securities & Advisory Services offered through LPL Financial, a Registered Investment Advisor.  Member FINRA/SIPC.

Optimal Wealth & Investments and LPL Financial are separate entities.  Investing involves risk including loss of principle.  ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF's net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.