What is the distinction between active and passive investment strategies?

The distinction between active and passive investment strategies is primarily rooted in their approach to achieving investment objectives. A passive investment strategy aims to replicate the performance of a specific market index or benchmark, which means that the investor is not trying to outperform the market but rather match its returns. This is typically accomplished through less frequent trading and a buy-and-hold strategy, resulting in lower transaction costs and management fees.

For instance, passive funds, such as index funds or exchange-traded funds (ETFs), are designed to follow the performance of a designated index, allowing investors to gain broad market exposure without the need for active management.

In contrast, active investment strategies involve frequent buying and selling of securities in an attempt to take advantage of market inefficiencies and achieve higher returns than the market average. This approach requires a more hands-on management style, often resulting in increased trading costs and higher fees.

Thus, the correct understanding of passive investing highlights its focus on achieving market-matching returns through a less active trading approach, distinguishing it clearly from the more dynamic and cost-intensive nature of active strategies.