When it comes to investing, one of the biggest debates is whether active or passive investing is the better approach. Passive investors prefer a 'buy-and-hold' strategy, whereas active investors believe in leveraging market movements to maximize returns. So, which is better?
In this post, we’ll break down the difference between active and passive investing, using our Market Turning Points signals as a case study to demonstrate how active trading, when executed with proper timing, can outperform a passive buy-and-hold strategy.
What Is Passive Investing?
Passive investing, also known as position trading or buy-and-hold, is an investment strategy where investors purchase stocks with the intent of holding them for the long term, regardless of market fluctuations. It’s simple, accessible, and encourages long-term growth by riding through both booms and busts.
This strategy serves as a benchmark to evaluate other investment methods. For example, if an active trading approach doesn’t outperform passive investing, it might not justify the added effort and risk.
But can an active trading strategy consistently outperform passive investing?
Active vs Passive Investing: A Cycle Signal Case Study
At Market Turning Points, our Cycle Signals provide an automated strategy that eliminates the need for personal analysis, making it just as simple as a buy-and-hold approach—but with a critical difference: it’s active.
Since 2015, we’ve tracked the performance of our Cycle Signals using QQQ. To compare, let's start with the performance of a passive buy-and-hold strategy over the same period.
How Buy-and-Hold Performed
A $1 investment in QQQ back in January 2015 would have grown to $4.93 by August 2024. That represents an annualized return of 18.28%. Not bad for a passive strategy that requires no active management.
But what if we add some active trading into the mix? Let’s look at the performance of our Cycle Signal, which trades an average of less than once per month.
How Active Trading Using Our Cycle Signals Compares
Now, let’s use our automated Cycle Signal to trade the same ETF (QQQ) since 2015.
By using our Cycle Signal, $1 would have turned into $12.51—an annualized return of 28.74%. That’s a 45% improvement over the buy-and-hold strategy! The reason for this improvement is that we "skipped the dips" and bought near the lows, using our entire account each time the market presented a buying opportunity.
But can we do even better?
Using Leverage to Maximize Returns
Next, we applied leverage to the same strategy, using the 2x (QLD) and 3x (TQQQ) versions of the QQQ ETF. Here’s how they performed:
While the shapes of the returns may appear similar to the original QQQ chart, the scale is entirely different. The 2x leveraged QLD turned $1 into $136.52, representing a 67.29% annual return, while the 3x leveraged TQQQ exploded that same $1 into $1,276.92—an astonishing 100.96% annualized return!
Risks of Leveraged ETFs
Of course, with greater rewards come greater risks. Leveraged ETFs experience more significant price swings, both up and down. So, while the potential returns are huge, you must have a strong risk management strategy to protect your capital during volatile periods.
That’s why it’s critical to manage stop-loss orders effectively and stick to a disciplined approach when trading leveraged funds.
For more on TQQQ Trading Strategies Click Here.
People Also Ask About Active vs Passive Investing:
1. What’s the main difference between active and passive investing?
Active investing involves regularly buying and selling securities to take advantage of short-term market movements, while passive investing is a long-term strategy that holds investments regardless of market fluctuations.
2. Which approach has higher returns, active or passive?
Historically, passive investing provides steady, reliable returns over time. However, when done effectively, active investing can outperform passive strategies, especially when leveraging the power of cycles like we do at Market Turning Points.
3. What are the risks of active investing?
Active investing can be more volatile than passive investing, as it involves reacting to short-term market conditions. It also requires more time and knowledge to implement successfully, particularly if you're using leveraged ETFs.
4. Is passive investing better for beginners?
Yes, passive investing is often better for beginners because it requires less involvement and offers a simple, low-cost way to gain exposure to the market. However, once an investor becomes more comfortable, incorporating active strategies can enhance returns.
Resolution to the Problem
Investors who rely solely on passive strategies like buy-and-hold miss out on the opportunity to take advantage of market cycles and potential short-term gains. By actively managing your portfolio, especially during market corrections or rallies, you can achieve significantly higher returns with a minimal increase in effort. Using automated signals and cycles, Market Turning Points offers an easy way to outperform traditional passive strategies.
Conclusion: Which Approach Is Better?
Both active and passive investing have their merits, but when it comes to maximizing returns, an active strategy can offer a significant edge. As we've seen, leveraging time-based Cycle Signals can help investors capitalize on market fluctuations while avoiding dips and downturns.
Whether you choose active vs passive investing, the key is having a disciplined, well-researched approach. If you're ready to move beyond buy-and-hold and take advantage of market cycles, our Market Turning Points Cycle Signals provide a simple yet powerful tool for maximizing your returns.
Join Market Turning Points
Are you ready to take control of your investments? By subscribing to Market Turning Points, you gain access to daily market commentary, real-time cycle analysis, and automated signals that take the guesswork out of trading. You’ll also get access to our weekly live webinars, Q&A sessions, recommended ETF positions, private Facebook Group and much more. Stop missing out on market opportunities—join Market Turning Points today and start making smarter investment decisions.
Author, Steve Swanson