Active investing bets on a specific and harder-to-achieve premise — that careful individual stock selection and timing can beat the broad market's own return.
The Approach and Track Record
Active investors research and select individual stocks, aiming to outperform a broad benchmark through stock-picking skill or market timing — inherently involving more trading activity, research time, and typically higher cost (whether your own time or a fund manager's fee) than passive investing. The honest, documented track record: a meaningful majority of professional actively managed funds have historically underperformed their benchmark index over long time horizons, after fees — meaning active investing's burden of proof is higher than passive's.
If pursuing active investing, tracking your own performance against a relevant benchmark honestly and consistently — not just remembering your best picks — is the only way to know whether your specific approach is actually working, since selective memory of winners is a well-documented behavioral bias.
Someone Confident in Their Stock-Picking Research: Track performance against a benchmark honestly to verify the approach is working.
Someone Uncertain Active Investing Is Worth the Time: The documented data favors passive investing for most investors over long horizons.
Approach Active Investing the Way
- Track your performance against a relevant benchmark, honestly and consistently.
- Understand the documented burden of proof active investing carries.
- Consider limiting active positions to a smaller satellite allocation.
See passive investing explained for the point of comparison.
