Dates of related message(s) in the Behavioral-Finance group (*): Year/month, d: developed / discussed, i: incidental
Active / passive (investing / management)	07/8d + See momentum trading, overtrading, speculation, buy and hold, style, time horizon
Buzzybee vs. Hibernatus Speed race vs. Marathon Definitions: Active investing - or active (portfolio) management - is money management based on short term operations with * Frequent arbitrages (see that word) * And/or momentum trading (see trend following). It tends also to imply an intensive use of derivative financial contracts (futures, options, CFD / contracts for difference...). Passive investing - or passive management - is a long term money management mode, with as few as possible buy and sell operations. It is also called "buy and hold" (see that phrase). But it cannot be fully inactive, some "reallocation" might be done such as * Periodic reassessments and fine tuning (i.e. one or twice a year), * More drastic reshuffle of assets in case of major foreseeable evolutions, to rebalance and adapt the portfolio, even to radically shrink or expand it. Relation with investor styles Active or passive investing is a key aspect of investor style (see style) The differences are linked to the investor's time horizons, risk attitudes, anticipation abilities and methods. Those are highly personal traits rather comparable, sorry if you find it outrageous, hope we stay good friends, to individual tastes in art or in the choice of a profession. Even if those human characteristics are in no way perverse, their applications to investing are sometimes labeled - depreciatively if not hatefully - in ideological circles, as: * Speculation (see that word) for active management (although risk taking and anticipation are what makes human beings different from lettuces) * Hoarding for passive management. (or "making money while you sleep", why not if you invested time and money in the first place?) Consequences for the investor Active: adaptation or overtrading? Passive: Zen management or status quo bias? Active investing has the advantage of adapting the asset portfolio to market situations. == But it can become highly risky and costly if it leads to overtrading / noise trading (see those words) and to an overconcentration of assets instead of diversification. Passive investing minimizes transaction costs and impulsive decisions. == But when it reaches extremes (see status quo bias) it goes against adaptation to situations and it has its risks also. For example it is usually financially dangerous to keep an asset which we overestimate just because we own it (see "endowment bias"), or because its price fell (see loss aversion). One form of passive investing is "index investing", but with the disadvantage of being subject to stock cycles if there is no diversification in other assets. Consequences for the market Hard to find the right speed. A balance between those two practices and between those two time horizons would help market efficiency. The car speed has to adapt to traffic conditions. But this balance is far from being always reached. Market distortions, and in extreme cases market illiquidity, might happen in periods when everybody plays only on: Either a short term basis (and with the same expectations), Or a long term horizon. This might show a denial that long term economic projections are uncertain and a collective dependence of investors to the same expectations ...or to gurus.

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