You may be wondering how to become an active investor vs being a buy and hold investor particularly in or near retirement.
Being an active investor has both advantages and disadvantages over being a buy and hold investor for sure.
Many active investors purchase traditional assets such as stocks and bonds, while other active investors buy and sell alternative investments, such as real estate or businesses.
It’s common for active investors to start with stocks, and then invest actively in alternative assets after they understand what’s involved in active investing.
The focus of this article is how to become an active investor in stocks and other traditional assets such as bonds since most investors already own them.
It may seem that if you know you’re going to be an active investor in stocks alone, the implementation will be simple by just picking good stocks to hold for the near term.
As an active investor in stocks, however, you’re faced with a myriad of options due to the many advanced investment strategies available now to individual investors.
In other words, investing is no longer about just picking good stocks like it used to be.
In this post you’ll see:
- Who is an active investor exactly?
- 5 steps to become an active investor
- Active investment examples
- The two main factors in selecting an active investment strategy
- The many options available for active investors in stocks
And much more.
So keep reading if you’re ready to select an active investing strategy that aligns with your own financial goals.
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Who Is an Active Investor Exactly?
An active investor is anything besides a buy and hold investor.
And there are many alternatives to buy and hold investing nowadays.
Step 1 to Become an Active Investor
The first step to become an active investor is to assess what investments you already have.
This will allow you to more easily modify your existing portfolio during the process of buying and selling assets based on your new active investment strategy while you’re transitioning from strategic vs tactical investing strategy.
It could be you’re just starting to invest and don’t have any investments yet.
Most investors who choose to become more advanced investors, however, have already accumulated some assets, often after following a buy and hold asset allocation model over a period of time.
In fact, many buy and hold investors take a more active investing approach after seeing stocks go down in bear markets despite some past success with a buy and hold approach.
So, go ahead and get control of your investments by organizing them to know exactly what investments you have now if you’re not already super clear about this.
An online app or a spreadsheet can assist with this task.
Step 2 to Become an Active Investor
The next step to become an active investor is to learn about investing to the point where you’re confident investing.
This may seem overly obvious.
Yet most of my financial coaching clients have never really studied investing since it isn’t commonly taught in school, especially active investing principles.
In particular, there is very little investment education now on strategies besides buy and hold investing since it’s popularity has sky rocketed over the past three decades.
But it takes another level of knowledge to become an active investor vs a buy and hold investor.
Buy and hold investing is very simple; investors frequently just follow a template indicating the percent of assets to allocate to stocks, bonds, or other types of investments.
On the other hand, active investing is almost the opposite. Active investors buy and sell assets based on where they see the most opportunity to make a profit over a shorter time frame.
This means that to become an active investor you’ll want to understand:
- The different kinds of investments, such as stocks, bonds, and commodities
- The ways to invest in each kind of investment, such as ETF’s or individual securities
- What drives the prices of the investments you plan to buy and sell
Step 3 to Become an Active Investor
The next step is to choose the kind of active investing strategy you wish to implement.
As previously written, there are many strategies to become an active investor.
And the different kinds of active investing strategies vary greatly.
Active Investment Examples
Below are a few active investment examples.
- Trading stocks
- Value investing in stocks, bonds, or other assets
- Swing trading stocks
- Rotating among ETF’s of various asset classes
- Buying and selling mutual funds a few times a year following a quantitative model
- Momentum investing
Note that some of these active investment strategies overlap.
For example, a trader may use a momentum based quantitative model.
Or an investor that actively rotates ETF’s may do so based on momentum or even valuations.
Or an investor may choose to swing trade value stocks holding them only until they become overvalued.
Trading Vs Active Investing
I often call active investing “proactive investing” to clarify the distinction between a buy and hold investor and an active investor since many people associate active investing with trading only.
Active investing isn’t necessarily trading. Trading is one way to be an active investor but generally traders are much more active than active investors are.
As you can imagine, the time and capital required to be a trader is very different from the time required to be a value investor that occasionally buys and sell stocks as valuations change.
First, some trading strategies require watching the market throughout the day, while value investing may require a only a few hours a month for evaluating investments and monitoring them.
Second, trading can be done with small amounts of capital, especially options trading. On the other hand, buying a good amount of high quality individual stocks is usually very capital intensive.
This means the next step to becoming an active investor is deciding how much capital you want to spend on active investing.
And after that, decide how much time you want to spend as an active investor since time is often more flexible than capital.
This will steer you toward an active investing strategy that aligns with your available capital and desired time frame.
Step 4 to Become an Active Investor
After you’ve clarified the amount of capital and time you want to apply toward active investing, the next step is to define what you want to achieve from your efforts as an active investor.
This will ideally stem from your personal wealth plan.
Is your overall goal:
Living off investments right away or long term growth of your investments or retirement account
Short term or long term capital gains
Buying and selling income generating assets (dividend stocks, REITs, bonds) for both capital gains and income
You can see there are many different ways to become an active investor once you step outside the realm of popular buy and hold investing even if you stick with traditional assets like stocks and bonds.
The key, then, is to match your desired outcome with the right assets and strategies to lead to those results with the least amount of investment risk.
Step 5 to Become an Active Investor
The next step to become an active investor is to marry the following dynamics from a big picture perspective to find the best active strategy for you:
- The amount of investment capital you want to apply toward active investing
- Your desired or needed investment returns to reach your financial goals
For example, if your goal is to make $10,000 a month from investing and you have even $1,000,000 of investment savings, there are a very limited number of strategies you could use.
This is because traditional investing in stocks is:
- Very capital intensive
- And after inflation investment income from dividends and interest is relatively low
In this case, a viable option might be time intensive active trading but this is certainly not for everyone.
Otherwise, you can re-evaluate your goals.
Does More Active Investing Improve Returns?
The thought of active investing holds potential for near term gains, so it sounds appealing to many investors.
But goals aren’t met without careful evaluation of which active investing method suits your needs and then at least some level of effort to implement and sustain the chosen strategy.
The reality is that active investing takes more effort than buy and hold investing.
This is coming from someone who has participated in both passive and active investing strategies, including trading, selling covered calls, and investing in ETF’s following a carefully chosen quantitative model that requires monthly rebalancing.
Using the big picture approach outlined in this post before you actually begin investing actively will steer you toward the right investment strategy to reach your financial goals while also maintaining your desired lifestyle.
Keep in mind that many investors allocate a larger portion of their investment capital to long term buy and hold investing while also allocating a smaller portion to an active investing strategy.
Summary for Becoming an Active Investor
Anyone can hastily become an active investor immediately by starting to trade or buying a handful of stocks to hold short term.
The key, however, is to select and learn the best active investment strategy based on your own financial goals and desired lifestyle.
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