Passive Versus Active Investing: An Introduction to Major Challenges

In my co-author's last post,  he introduced some characteristics of passive and active investing. Both have challenges.

For passive investing, cognitive biases that affect decision making are a major challenge. This is also true for active investing, but it might be particularly prevalent in passive investing. It is somewhat common to see a self-prolaimed passive investor changing to an active strategy due to cognitive biases, but it is much less frequent that cognitive biases result in an active investor investing with a passive strategy. Since there are several dozen cognitive biases, this is a real and significant challenge.

For active investing, fees and expenses are a major challenge. Active investing is more expensive than passive investing. Furthermore, passive investing is now being offered for free. This is a major challenge to active investing because fees are one of the most impactful factors in investing.

While the passive versus active debate will likely never be resolved in the minds of everyone, there are major challenges to be faced no mater what ideology one chooses.

- Joe