Advantages and Disadvantages of Active and Passive Investment (Essay Sample)

Retirement Investment Plan
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Retirement Investment Plan
Choosing the right retirement investment plan is an important aspect of planning for life after work. Topa et al. (2017) state that the number of retirees has increased in the last few decades in the United States making it difficult for the government to provide a quality lifestyle for the older generation via pension schemes. As such, individual investment programs for the members of the society are encouraged to ensure financial security for senior citizens. Two methods of retirement investment can be used, namely active and passive mechanisms. In an active venture, the portfolio manager tries to outperform the benchmark by trading the securities with high returns (Anadu et al., 2020). On the other hand, in passive investment, a person applies the buy and hold or indexing strategies to maximize profits (Chovancova & Arendas, 2015). Both active and passive investments yield positive results based on the nature of the market but for an investment plan which is long-term, a passive approach would be more profitable over an active one.
In active investment, managers take advantage of price fluctuations in the market to maximize income. The strategy has been effective in emerging markets where high levels of inefficiencies exist (Cox, 2017). Trading in such circumstances requires one to have a better understanding of the market conditions to choose securities with the lowest risks. Moreover, active traders are required to make very few mistakes in their activities to prevent excessive loss. By selecting less risky shares to trade, the manager outperforms the market capitalization weight leading to higher levels of income. In addition, active trading