It’s hard to beat the market.
Data from Morningstar show that only 38% of stock pickers outperformed the market in 2024 — a figure only marginally higher than the 37% that did so in 2023. Meanwhile, S&P Global found that only 22% of companies in the S&P 500 beat the index as a whole over a 20-year time period.
That’s why Morningstar has gone as far as to call active investing a “loser’s game” and say the winner’s game is passive investing.
With odds like this, it’s no wonder that passive investing — which involves allocating money into low-cost, index-tracking ETFs, and taking a backseat — has gained so much popularity over the years. Index-tracking ETFs aim to give investors diversified exposure to the stock market and returns that are close to the performance of the underlying index. As Morningstar notes, fees for these ETFs are getting lower, allowing investors to keep more of those returns.
And perhaps the biggest sell for passive investing is that it doesn’t require too much attention from the investor. It’s a one-size-fits-all approach that works well for most people.
But Jeff Joseph, the head of content at financial platform Tastylive, has an issue with the active-versus-passive debate. An active trader himself, Joseph argues that people are too quick to discount active investing, and can gain from learning how to trade.
According to Joseph, here’s why investors should consider active investing as part of their strategy.
1. Understanding the math
The first step when considering active investing is to understand how the math behind it works.
An active investor’s goal is to beat the market. In 2024, the S&P 500 returned more than 23%, representing the average performance of 500 of the largest U.S. companies as weighted by market capitalization.
Because the index is an average, there are companies that both outperformed and underperformed the broader index. An active investor’s job is to pick the companies that outperform.
This is much easier said than done. A stock-picking contest by the Observer once pitted investment professionals against a group of students — and a cat. In the end, the cat won, showing that stock picking sometimes just comes down to chance.
With that element of randomness, it’s important for active investors to set up guardrails to prevent financial harm. That could involve things like setting stop losses; only investing in companies that the investor knows well; or limiting the amount of money an investor is willing to actively trade with. This can help shift the odds toward the investor’s favor.
“Probabilities are something that everyone needs to learn and understand, and the way you learn that is by being an active investor,” Joseph told Link News.
2. Active investing allows people to learn
The value of your portfolio can be measured in returns, but Joseph said that there’s also value in what you learn by investing.
Just like probabilities, there are lessons to be learned by becoming a more active investor. Analyzing balance sheets and weighing competitive advantages can help investors build analytical skills that can translate outside of investing.
“Wrestling with margin-of-safety calculations and cash-flow models can make you better at evaluating career moves, real-estate purchases and startups,” Joseph said.
By investing passively, investors are offloading that mental work to fund managers. That’s not a bad thing, but it also doesn’t teach investors as much about how markets work.
Joseph took this a step further, saying that fund managers pushing passive investing represent a form of “anti-intellectualism.” Although this may be a strong take, 26-year-old retail investor Aiden Lewis had similar opinions.
“I’m morally opposed to passive investment because it saps away insight and responsibility from the markets. It reduces the amount that firms are punished for inefficient and morally bad behaviors, and at the same time reduces the amount that good firms are rewarded for innovation and morally good behaviors,” Lewis told Link News.
Retail investors have been unfairly nicknamed “dumb money” by the financial industry, but education allows everyday investors to prove the professionals wrong. Joseph also noted that new technology has made it easier than ever before to not only trade, but also find information, study technical patterns, perform analysis and further one’s education.
3. You can be a passive and active investor
While people in the investing industry will argue their stance on the active-versus-passive debate, as an investor, you don’t have to pick one side or the other — you can do both.
“Don’t fall for this false binary choice,” Joseph said. “An investor with any meaningful portfolio should have both [approaches].”
Joseph’s opinion is that new investors should start out with passive investing, and as they get more experienced, they can gradually play a more active role in managing their portfolio.
“Every investor should have index funds; every investor should have an active portfolio. This is not a binary choice,” Joseph said. “As you get more experience, then you should start shifting more of your portfolio from passive to active self-directed.”
The data show that many people are taking this approach. Over the past decade, retail investors have become more and more active in their investing. There are a few reasons for this, including things like new technology providing better access to markets and strong U.S. stock-market performance over the past decade.
In this current environment, it’s easier than ever for retail investors to actively participate in markets.
