What Is Active Investing and Why Is It Different from Passive Investing?

Successful investing requires critical decisions that shape long-term financial outcomes. One of the most fundamental choices investors face is whether to take an active or passive approach. This decision impacts everything, from portfolio performance to risk exposure, as well as overall wealth-building potential.

Stansberry Asset Management actively invests on behalf of clients, implementing strategies designed to navigate market complexities and maximize returns. Unlike passive investing, which tracks market performance, active investing seeks to capitalize on opportunities in real time. Understanding this distinction helps investors recognize the value of working with a firm that takes a hands-on approach to managing their wealth.

What Is Active Investing?

Active investing is a hands-on approach in which investors, or professional managers, actively manage portfolios by analyzing market trends, company performance, and economic indicators. 

This method involves:

• Research and Analysis: Investment decisions are based on deep fundamental analysis and macroeconomic trends.
• Portfolio Adjustments: Active managers reallocate assets in response to market conditions, aiming to outperform benchmarks.
• Strategic Trading: An active investor buys and sells securities rather than holding assets indefinitely. Some firms, like Stansberry Asset Management, prioritize long-term investment goals. SAM trades when necessary –  when it aligns with their investment team’s conviction in a company’s long-term potential.

An active investor seeks higher returns by capitalizing on market inefficiencies. This strategy demands expertise, continuous monitoring, and decisive action.

What Is Passive Investing?

Passive investing, in contrast, takes a long-term approach by minimizing trades and mirroring broad market indices. This strategy relies on:

• Index Funds and ETFs: Investors buy diversified funds that track major indices like the S&P 500.
• Buy-and-Hold Mentality: Instead of reacting to market fluctuations, passive investors ride out volatility.

While passive investing appeals to those seeking broad market exposure with minimal effort, it lacks the flexibility to adapt to shifting market dynamics or exploit mispriced assets.

Key Differences Between Active and Passive Investing

Active and passive investing differ in strategy, execution, and potential outcomes. However, the choice is not necessarily binary. SAM’s approach is rooted in informed, active management, tailoring investment strategies to align with an investor’s financial goals, risk tolerance, and time horizon. Rather than passively following the market, SAM actively manages portfolios to adapt to changing conditions and seek the best opportunities for long-term success.

At Stansberry Asset Management, active investment strategies are designed with a long-term perspective. While portfolios may involve active decision-making and adjustments, individual securities are selected with a strategic investment horizon in mind rather than short-term speculation. The approach varies based on the investor’s financial objectives, ensuring a tailored strategy that fits each client’s individual needs rather than a one-size-fits-all methodology.

Pros and Cons of Active vs. Passive Investing

Investors often weigh the benefits and drawbacks of active vs. passive investing, but the decision is not always clear-cut. While passive investing follows a set-it-and-forget-it approach, active investing offers a dynamic, tailored strategy that adjusts to market conditions and individual financial goals. 

Understanding the advantages of active investing and its potential challenges can help investors determine whether this approach meets their needs.

Pros of Active Investing

Potential for Outperformance

One of the primary advantages of active investing is the ability to outperform the broader market. Passive investing is designed to mirror market performance, meaning investors accept average returns tied to an index. Active investing, however, offers the opportunity to exceed those returns. This can be achieved through:

• Deep Research and Stock Selection

An active investor doesn’t just buy into an index. They conduct extensive analyses of individual companies. Evaluating fundamentals allows them to identify businesses with strong long-term potential.

• Identifying Undervalued Stocks

The stock market does not always accurately price assets. Active managers analyze mispriced stocks and buy undervalued companies before their prices rise, creating higher return potential than index-tracking strategies.

• Optimized Portfolio Adjustments

Rather than holding investments indefinitely, active investors adjust their portfolios based on market conditions to take advantage of new opportunities and mitigate risks.

Instead of passively accepting whatever the market delivers, active investors seek to capture growth where others may overlook it.

Flexibility to Respond to Market Conditions

Market cycles fluctuate. Passive investing provides no mechanism to respond to these shifts. If the market declines, passive investors remain fully exposed. Active investing, however, enables tactical adjustments to protect capital, mitigate downside risk, and capitalize on market trends, helping to safeguard portfolios during periods of volatility while positioning for long-term growth.

Acting investing provides flexibility through:

• Sector Rotation

Active investors strategically allocate capital based on market conditions, identifying opportunities and managing risk accordingly. 

At Stansberry Asset Management, this approach has resulted in strategic investment decisions—such as completely avoiding fixed income going into 2022 when yields were historically low. Similarly, as 2024 came to a close and 2025 began, SAM carefully managed risk by minimizing exposure to the Magnificent 7 stocks. Rather than following broad market trends, the firm takes a deliberate approach to investing, aligning decisions with long-term objectives and evolving economic landscapes.

• Reducing Exposure to Struggling Industries

Some industries decline due to technological disruptions, regulatory changes, or economic headwinds. Active investors can exit weakening sectors early.

• Seizing Short-Term Opportunities

Not all investments are long-term plays. Active investors can take advantage of short-term inefficiencies to generate additional returns.

The ability to adapt to changing market conditions allows active investors to mitigate losses and enhance overall portfolio performance.

Risk Management and Downside Protection

While passive investors accept all market risks, active investors have tools to limit losses and manage volatility. When downturns occur, active managers can take defensive actions to protect capital and preserve long-term growth. The most effective methods include the following:

• Hedging Strategies

Active investors may use techniques like options hedging or inverse positions to cushion against market declines. Passive investors do not have such protection.

• Tactical Asset Allocation

During bear markets, active investors may increase cash positions or move into safer asset classes. This approach reduces exposure to volatile equities and preserves capital.

• Proactive Sell Decisions

Unlike passive investors, who are locked into index holdings regardless of price movement, active investors can exit poor-performing investments early, avoiding steep declines.

Rather than passively riding market crashes, active investing offers proactive risk management strategies to preserve wealth and limit downside exposure.

Cons of Active Investing (And How To Manage Them)

Higher Costs

Because active investing requires more research, more trades, and professional expertise, it typically comes with higher fees.

However, SAM uses an inclusive fee structure, with no extra charges for services like financial planning, strategy adjustments, or our active investment strategies. 

Stansberry Asset Management manages costs through:

• Strategic, long-term stock selection minimizes excessive trading and unnecessary transaction fees.
• Focus on high-value opportunities ensures that investments are purposeful rather than reactive.

Requires Expertise and Monitoring

Successful active investing demands research and continuous analysis. Individual investors may struggle with this. Investors can overcome this challenge by:

• Relying on professional investment managers with a track record of research-driven decision-making.
• Using a disciplined, long-term strategy rather than emotional or speculative trading.

No Guaranteed Outperformance

Active investing aims to beat the market, but no strategy is foolproof. Markets are unpredictable, and even skilled managers may not outperform every market cycle.

Investors can mitigate this using the following:

• Long-Term Focus: Avoid short-term speculation. Instead, invest in fundamentally strong businesses with sustained growth potential.
• Diversified Portfolios: Reduce risk by spreading investments across sectors, industries, and asset classes.

While no strategy guarantees success, disciplined, active management increases the probability of achieving superior returns.

Pros of Passive Investing

Lower Costs

One of the most appealing aspects of passive investing is its low-cost structure. Since passive strategies require minimal portfolio adjustments, they typically involve fewer fees and lower expense ratios than actively managed funds.

Passive investing appeals to those who prioritize minimizing fees over maximizing returns. However, at Stansberry Asset Management, clients benefit from informed, active management without the additional costs. This allows investors to access expert decision-making and dynamic portfolio adjustments while maintaining cost efficiency.

Simplicity and Automation

Passive investing offers a hands-off approach that requires little to no involvement from investors. This approach may make sense for self-directed investors who prefer a simple, low-maintenance strategy and are comfortable riding out market fluctuations without adjustments.

However, if working with a wealth manager or financial advisor, a purely passive approach raises the question—why pay for professional management if no active decisions are being made? SAM emphasizes the importance of informed active management, recognizing its role in navigating market shifts, managing risk, and optimizing long-term returns, rather than simply following the market.

Historically Competitive Returns Over Long Periods

Passive investing is built on the premise that, over time, markets tend to rise. While individual stocks experience ups and downs, broad market indexes have historically delivered steady long-term returns.

While passive investors may not achieve the highest short-term gains, they can benefit from steady returns over decades, making it an attractive option for retirement accounts and conservative investors.

Cons of Passive Investing (And Why It Falls Short)

No Ability to React to Market Downturns

One of the most significant disadvantages of passive investing is the lack of control during market declines. Because passive strategies mirror an index, investors remain exposed to market crashes, economic downturns, and sector-wide declines.

Example:

During a recession, active investors can shift capital into defensive sectors or reduce stock exposure. Passive investors must endure the entire market decline without adjusting holdings or limiting losses.

Without the ability to proactively manage risk, passive investors are at the mercy of market volatility and cannot cushion against downturns.

Missed Opportunities for Outperformance

By design, passive investing is focused on tracking the market, not beating it. This means investors never exceed market returns regardless of whether better opportunities exist.

Here’s why passive investors miss out on high-performing stocks:

• No Early Investment in Growth Stocks: Emerging companies with high growth potential are not included in indexes until they reach a specific market capitalization. Much of their growth has already occurred by the time they are added.
• No Ability to Identify Undervalued Stocks: Passive strategies do not analyze stock fundamentals. They hold everything in the index, including overvalued companies that may be declining in profitability.
• No Tactical Adjustments: Active investors can buy strong-performing stocks early and sell declining stocks before losses deepen. Passive investors do neither.

This means passive investors settle for market-average returns rather than pursuing outperformance through intelligent stock selection.

Limited Portfolio Customization

Every investor has unique financial goals, yet passive investing treats all investors similarly by offering a standardized approach. It does not consider:

• Risk Tolerance: Passive investors cannot adjust portfolio volatility. They are fully exposed to the index, whether stable or highly volatile.
• Investment Time Horizon: Some investors need shorter-term liquidity, but passive strategies assume investors have long-term investment horizons.
• Income Needs and Capital Preservation: Passive funds do not prioritize dividend-paying stocks or other income-generating assets, limiting their use for retirees or income-focused investors.

Passive investing provides zero customization, limiting its effectiveness for those with specific financial needs.

Which Investment Approach Is Right for You?

There is no universal answer to whether active or passive investing is best—it depends on an investor’s goals, risk tolerance, and market outlook. Some investors prefer actively managed portfolios that capitalize on market opportunities, while others may lean toward a long-term passive approach.

At Stansberry Asset Management, investment strategies are tailored to the individual. Whether an investor seeks higher returns, capital preservation, or a mix of both, portfolios are designed to align with financial goals and market realities. An informed active management approach not only seeks growth but also prioritizes risk mitigation and downside protection—helping clients navigate market fluctuations while positioning for long-term success.

Key Factors to Consider

Risk Tolerance: How Much Volatility Can You Handle?

Investors must assess their comfort level with market fluctuations.

• Active investing appeals to those who want to proactively manage risk and adjust their portfolio based on market conditions. Investors seeking downside protection and strategic asset allocation prefer an active approach.
• Passive investing requires accepting full market volatility. Investors must be comfortable riding out downturns without making adjustments.

For investors who value risk mitigation, active investing allows them to limit exposure to downturns while capitalizing on opportunities.

Time Commitment: How Involved Do You Want to Be?

Investing requires different levels of engagement.

• Active investing demands expertise and ongoing portfolio adjustments. While individual investors may not have the time or resources to manage this independently, working with experienced portfolio managers ensures decisions are based on data, not emotions.
• Passive investing is hands-off, requiring little involvement beyond the initial investment. However, this means missing opportunities to adjust to market conditions or optimize returns.

For investors who prefer a strategic, research-backed approach without the burden of daily management, active investing by professionals offers a strong advantage.

Financial Goals: Growth, Stability, or Income?

Investment objectives vary, and the strategy should reflect specific financial needs.

• Growth-oriented investors may prefer active investing to capitalize on emerging opportunities, undervalued stocks, and strategic shifts in market cycles.
• Risk-averse investors benefit from active strategies that minimize volatility while preserving long-term capital.
• Income-seeking investors may require customized dividend-focused portfolios, which passive investing doesn’t accommodate as effectively.

At Stansberry Asset Management, investment strategies are aligned with individual financial goals, ensuring that portfolios are structured to optimize returns, minimize risk, and meet long-term objectives.

Why Stansberry Asset Management is the Right Partner for Your Financial Future

Stansberry Asset Management (SAM) is a Registered Investment Advisor with the United States Securities and Exchange Commission, specializing in personalized investment strategies and informed, active wealth management services for affluent individuals. The firm’s mission is to help clients build portfolios that provide peace of mind and align with their financial goals.

Comprehensive Wealth Management

SAM takes a holistic approach to wealth management, recognizing that every client’s financial journey is unique. Services include retirement planning, estate planning, tax planning, risk management, and strategic investment management — ensuring all aspects of a client’s financial life are considered.

Diverse Investment Strategies

To cater to varying investment objectives, SAM has 9 different investment strategies. 

• All-Weather Strategy: A risk-averse approach focused on wealth preservation. It protects against downside risk during bear markets while participating in gains during bull cycles.
• Forever Strategy: Designed for long-term growth, this strategy invests in high-quality businesses with strong competitive advantages. It suits risk-tolerant investors who are comfortable with market volatility.
• Tactical Select Strategy: A core SAM strategy balancing growth and risk management. Using fundamental research and quantitative screening, it adapts to market conditions, adjusting exposure to seize opportunities and mitigate risk.
• Total Alpha Strategy: Built for risk-tolerant investors seeking growth. It captures upside in bull markets while maintaining strict risk controls in downturns. Diversified across investment styles, it blends aggressive growth with protective measures.
• Income Strategy: Prioritizes generating reliable income while also providing growth in up markets and protection in the event of a significant market downturn.
• Venture Growth Strategy: This strategy does not have market capitalization constraints but often targets smaller companies that are earlier in their lifecycle and which we believe have long runways for growth ahead of them. It is focused on generating long-term capital appreciation.
• Treasury Strategy: Seeks to maximize yield while maintaining liquidity and the diversification benefits that come with investing in different parts of the yield curve.
• Cornerstone Strategy: Meant for long-term investing and is focused on owning high-quality businesses expected to perform well through a full market cycle.
• Gold Strategy: Designed for clients who want to allocate more of their net worth to precious metals (primarily gold) and related investments.

Client-Centric Approach

At the core of SAM’s philosophy is a commitment to client satisfaction. The firm prioritizes understanding each client’s unique financial aspirations and risk tolerance, crafting investment plans tailored to individual goals and personalities. This dedication to personalized service empowers clients to focus on what matters most, knowing their investments are managed with expertise and care.

Engagement and Education

SAM believes in keeping clients informed and engaged through various resources:​

• Educational Webinars and Events: Regularly scheduled sessions provide insights into market trends, investment strategies, and financial planning. ​
• Media Hub: A collection of blogs, articles, whitepapers, and videos to enhance clients’ understanding of financial markets and investment opportunities.

Stansberry Asset Management is a trusted partner for those seeking tailored investment solutions and comprehensive wealth management. With diverse strategies and a client-centric approach, SAM ensures investors are well-equipped to achieve their financial objectives.

Start Your Journey Toward Smarter Investing Today

Stansberry Asset Management is committed to helping investors take control of their financial future with a strategic, actively managed approach. Building wealth is about more than just following the markets — it requires thoughtful decision-making, risk management, and adaptability to changing economic conditions.

Whether the goal is preserving wealth, growing assets, generating income, or achieving a balance of all three, SAM’s tailored strategies provide the guidance and structure needed for long-term success. The firm’s disciplined investment approach, combined with holistic wealth planning, ensures that every aspect of an investor’s financial picture is considered.

With a deep understanding of markets, a data-driven approach, and a focus on personalized service, SAM actively manages portfolios to navigate market fluctuations, identify opportunities, and keep investments aligned with long-term objectives. Investors can sleep well at night knowing their wealth is in the right hands — carefully managed by a team dedicated to their financial success.

Let’s create a plan for your financial success. Start the conversation and get started today. Contact SAM.