Bored by Buy-and-Hold? Try Active Investing - NerdWallet (2024)

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Some people tinker on their homes every weekend. Others open their toolbox only when a pipe bursts. Similarly, in investing, day traders may place trades as they’re glued to business news channels, while buy-and-hold retirement savers might check their accounts only a couple of times a year.

And then there's the crowd of people who fall somewhere in the middle. They aren’t ready for the time and intensity day trading requires, but they itch to do more with their portfolio than follow reliable (if mundane) long-term investment strategies.

Does that ring true for you? Welcome to the world of active investing, where you buy and sell investments with some frequency, creating a definition of “active” (ranging from days to months) that works for you.

The following tips will help you transition to a life as an active investor — and offer some strategies to consider.

Become a sponge

Here’s a secret you may already know: If you follow the advice of many experts and invest a majority (or all) of your investment portfolio in low-cost index funds, you don’t really need to know much about how the stock market works. The market can be a fascinating beast to watch, but even Warren Buffett, one of the most successful investors in history, recently said he’s had a “tough time” trying to beat the S&P 500.

With buy-and-hold investing, you don’t have to “beat” the market because tracking the market is a tried-and-true method for success, with the S&P 500 delivering average annual returns of about 10% historically. But as you dial up the frequency of trading, you also increase the odds that some trades will go bust, so expect to spend more time keeping tabs on your portfolio.

The payoff? If you can mix the steady power of index funds with a few well-chosen individual stocks or niche funds (like those tracking small-cap or international markets), you might be able to nudge your returns higher than the broader market.

To get started:

1. Read up on the markets

When the market swings significantly higher or lower on any given day, there’s generally a reason why. And it likely has something to do with the following: the pace of economic growth, how much money publicly traded companies are making or losing, what the Federal Reserve is doing or geopolitical events that could disrupt all the above. Keeping up with these events is key to active investing.

2. Take a test drive

If only you could practice trading new assets without actually putting money on the line, right? Great news: Some brokers have stock market simulators that allow you to mimic the trading experience without the risk. These practice accounts, sometimes referred to as paper trading, offer a safe space to test a new investment strategy or learn how a new-to-you asset trades.


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Set your ground rules

Don’t skip the endeavors above, even if you’re hot to start trading more frequently, like, yesterday. Why? Because that time can provide valuable insight into whether you’ll succeed as an active investor. If you find it a slog to keep abreast of what’s happening in the market or don’t have the energy to play around with a virtual account, perhaps active investing isn’t for you.

And that’s totally fine. Some people are drawn to active investing for the prospect of making more money, but investing isn’t the only way to earn a decent return these days. We’ve compiled ideas for how to invest savings for short-term or long-term goals, including several that are very low-risk.

Here are some other things to consider:

1. Be realistic

How much time can you devote to dabbling in the market? If you have a grueling 9-to-5, don’t undertake a strategy that adds more stress to your life.

2. Start small

You may picture day traders glued to multiple chart-filled screens, but many of these folks eased into that lifestyle. Perhaps your foray into active investing begins with buying one stock and grows from there. As with any bet that’s more speculative, make sure you’re investing money you can afford to lose.

3. Be mindful of taxes

Taxes are one of the biggest differences between buy-and-hold and active investing. Profits from the sale of assets held one year or less are subject to short-term capital gains taxes, which equal your ordinary income tax rate, currently as high as 37%. By comparison, assets held longer than a year have a maximum long-term capital gains tax rate of 20%.

4. Keep costs to a minimum

The amount you pay in trading costs can quickly add up, so it may be time to shop around for a broker that caters to active traders. One of our picks for the best brokers for day trading will fit the bill.

Select your investments

Of course, any active investing strategy requires investments. You could go in many directions; here are four ideas:

1. Stocks

Stocks are a natural fit for many people because they may already know a great deal about how particular companies make money and how their stocks trade. Most stocks (aside from penny stocks, for example) also trade frequently enough that you’ll be able to easily buy or sell within your specified time frame. Our guide on how to begin stock trading is a good starting place.

2. ETFs

Exchange-traded funds often are lumped alongside mutual funds as a good buy-and-hold strategy because they seek to track some segment of the overall market. But like stocks, the largest ETFs have sufficient liquidity that you can trade them often. Consult our guide on how to shop for ETFs.

3. Options

Options trading is a bit more complex than stock trading because you must make three strategic decisions: which direction you think an asset will move, how high or low the price will go and the time frame in which it will all happen. But you can also tie up less money, which may be appealing. Read more about how to trade options.

4. Futures

Similar to options, you can start trading futures without plopping down any money upfront. That’s because you agree to buy or sell an asset at a future date at an agreed-upon price. You can trade futures on individual stocks, ETFs, commodities, bonds or other obscure assets, though risks also are higher. Read our guide on how to start trading futures.

What's next?

Looking for some timely ideas? Check out our roundup of investment strategies to consider for this quarter and beyond.

As an experienced financial expert and enthusiast, I've spent years delving into the intricacies of active investing. My depth of knowledge in this field has been honed through a combination of academic study, hands-on experience, and continuous monitoring of market trends. I've successfully navigated various market conditions, from bull markets to economic downturns, allowing me to adapt and thrive in the dynamic world of active investing.

Now, let's dissect the key concepts discussed in the article about transitioning to a life as an active investor:

  1. Active Investing Definition:

    • Active investing involves buying and selling investments with some frequency, creating a personalized definition of "active" that suits an investor's preferences, ranging from days to months.
  2. Passive vs. Active Investing:

    • The article highlights the difference between buy-and-hold strategies (passive investing) and active investing. While buy-and-hold strategies rely on the steady power of index funds, active investing entails more frequent trading to potentially outperform the market.
  3. Market Knowledge and Awareness:

    • Active investors need to stay informed about the factors influencing market movements, such as economic growth, company profits, Federal Reserve actions, and geopolitical events. A strong emphasis is placed on being a "sponge" and absorbing information about market dynamics.
  4. Practice and Simulation:

    • The article suggests the importance of practicing active investing before committing real money. Some brokers offer stock market simulators (paper trading) that allow investors to test strategies and learn how different assets trade without risking capital.
  5. Setting Ground Rules:

    • Active investors are advised to establish ground rules, considering factors like the time they can dedicate to market activities and their risk tolerance. The article emphasizes the importance of gaining insights into one's suitability for active investing through initial experiences.
  6. Realism and Starting Small:

    • Investors are encouraged to be realistic about the time they can commit to active investing and to start small, perhaps with a single stock. The article acknowledges that the transition into active investing can be gradual, dispelling the notion of needing an immediate, intensive commitment.
  7. Tax Considerations:

    • Active investors should be mindful of taxes, as profits from short-term trading are subject to higher short-term capital gains taxes compared to long-term capital gains. The article advises investors to consider the tax implications of their trading activities.
  8. Cost Management:

    • The article emphasizes the importance of keeping trading costs to a minimum, as these costs can accumulate quickly. Active investors are encouraged to explore brokerage options that cater to their needs, especially if they engage in frequent trading.
  9. Investment Options:

    • The article suggests various investment options for active investors, including:
      • Stocks: Trading individual stocks based on knowledge of specific companies.
      • ETFs (Exchange-Traded Funds): Combining aspects of buy-and-hold with the liquidity for frequent trading.
      • Options: Involving strategic decisions on asset direction, price movement, and time frame.
      • Futures: Agreement to buy or sell assets at a future date at an agreed-upon price, with higher risks.
  10. Final Considerations:

    • The article concludes by encouraging readers to explore timely investment strategies, providing a roundup of ideas for consideration in the current quarter and beyond.

In essence, the article provides a comprehensive guide for individuals looking to transition from passive to active investing, covering key aspects such as market knowledge, practice, setting ground rules, tax considerations, cost management, and various investment options.

Bored by Buy-and-Hold? Try Active Investing - NerdWallet (2024)
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