The phrase “strike while the iron is hot” is just as relevant within the world of finances as it is when referring to jumping upon any type of potentially lucrative opportunity. We often hear the terms “passive” and “active” income. Some believe that earning a passive income is the most effective way to build a lucrative side hustle. However, many successful investors will beg to differ. Let’s look at the differences between these two concepts before examining why embracing a more assertive approach will provide sustainable results.
Active Versus Passive: What are the Differences?
Active income is generally defined as liquidity arising from the result of services rendered. Examples include wages, salaries and income from other financial ventures. Passive income is primarily the result of rental properties, limited partnerships and similar roles in which you have little day-to-day influence. So, why is embracing an active approach recommended within the world of investing?
Proactivity Within a Changeable Landscape
It should be relatively obvious that active investment strategies are able to take advantage of short-term movements within a malleable marketplace. For instance, let’s imagine that you have just opened a futures position in gold. The value of the United States dollar drops and the price of gold per troy ounce jumps up by two per cent. Active investors will quickly realise this profit margin, sell their assets and then reinvest the earnings. Passive individuals are more likely to miss out on such a lucrative short-term opportunity. It pays to remain active within today’s world.
Better Risk Management
Another massive reward associated with active investment methodologies is that investors are able to monitor and mitigate risks much more effectively. Should they notice that a position suddenly takes on a bearish flavour, they will be able to shuffle their holdings accordingly. This is why many active investors fared relatively well during the 2008 financial crisis; they adjusted for rough weather on the horizon.
Active investors will often look a the “big picture” in order to determine which sectors are most likely to turn a profit. As opposed to leaving their funds within a position losing ground, they will plan ahead and leverage any fast-moving assets. Traders who took advantage of the dot-com era are a perfect example of this approach.
Short-Term for Long Profits
Active investors are often interested in accruing short-term profits through the use of positions such as CFDs, Forex trades and spread betting. The spread betting examples on the CMC Markets website are quite comprehensive and they illustrate how such vehicles can be used to leverage the movements of the markets.
Clarity, Education and Insight
We should never associate active investing with taking obtuse risks or relying upon gut instinct alone. On the contrary, the reason why this approach is so successful involves the amount of prior research that takes place before a position is ever opened. Active investors realise that while opportunities exist, there is always something more to learn. Embracing this rather humble attitude helps them to discern a good prospect from a decidedly risky venture.
Succeeding within the world of active investing is akin to running a race. Winners are those who put their best foot forward from the very beginning.