Investment strategies with ETFs: active or passive?

In today’s global financial markets, private investors face a variety of ways to invest their assets. So-called Exchange Traded Funds, ETFs for short, are particularly popular, which are characterized by their broad spread and low costs. But behind this seemingly simple investment instrument is a complex world of different strategies that will help to improve the success of thesignificantly influence investments. Experts basically distinguish two approaches: active investing, where people are constantly looking for the best opportunities, and passive investing, which relies on long-term holding and replicating an index. Both strategies have their own advantages and challenges that need to be understood to provide a well-foundedto make a decision. This article classifies the topic, explains the differences between the approaches and shows which strategy can offer better prospects for success in the long term. The aim is to convey the basics for an informed decision when dealing with ETFs and to present the respective advantages and disadvantages in a comprehensible manner.

The importance of the right strategy when investing

Anyone who wants to invest their savings sensibly faces a variety of options today. ETFs have become one of the most popular forms of investment in recent years because they enable cost-effective diversification across many markets and industries. But choosing the right strategy is crucial for long-term success. Because it is not enoughjust invest in ETFs; Rather, it depends on how you control these investments and which approach you choose. The two most important strategies are active and passive investing. While one focuses on short-term opportunities and targeted selection, the other takes a long-term, calm approach. Both approaches have their justification and are suitablefor different types of investors. In the following, these strategies are presented in detail, their respective advantages and risks are explained and explained why the choice of strategy significantly influences success.

Active Investment: The Desire for Excess Returns Through Targeted Analysis

Active investing is characterized by the effort to achieve a better return than the average market through continuous analysis and conscious decisions. Investors choosing this strategy are trying to beat the market by specifically searching for the most promising stocks or trying to get the best time to get in or out.determine. They use a variety of methods, ranging from fundamental analyzes to technical chart analyzes. The aim is to outwit the market and to use the best opportunities for building your own wealth. This approach is comparable to the work of a professional fund manager trying day after day through research, market observationand to create value-added short-term reaction to market movements. Active investing is based on the conviction that it is possible to surpass the average market through targeted decisions, which should lead to a higher return in the long term.

Market Timing: Find the best time to get in and out

A central element of active investing is so-called market timing. Investors try to identify the ideal time to buy or sell shares in order to benefit from price movements as much as possible. The principle behind it is simple: You want to buy as early as possible if you drop a price and sell it again if you rise. The goal is the so-calledTo get low points and then get off at the high points – i.e. according to the motto “Buy low, sell high”. Short-term trends, market sentiments and technical signals are used to identify the best entry and exit points. Although this strategy sounds tempting, it is extremely difficult to implement in practice. The prediction of price movements is like thiscomplex that it is often considered almost impossible. Most investors trying to time the market are in danger of making wrong decisions and suffering losses.

Stockpicking: The Art of Choosing the Best Stocks

Another element of active investing is the so-called stock picking. Here, the investor focuses on the selection of individual stocks, which he believes will perform better than the overall market in the near future. The analysis is based primarily on fundamental key figures such as profits, sales, debt ratios or valuation indicators. The aim is to increase sharesIdentify that are currently undervalued and therefore still have potential for price increases. Likewise, attempts are being made to avoid stocks that have already reached their high or are on the retreat. This approach requires a lot of expertise, time and experience to make the right decisions. The goal is to select the best chances by selecting themto use high returns. However, stock picking is also associated with risks, because a wrong assessment can lead to considerable losses. Both strategies – markettiming and stockpicking – require that the investor is constantly active in the market and makes new decisions on a regular basis. Some investors hire professional fund managers to do thistake over.

Passive Investment: The quiet approach for long-term success

In contrast to the active approach, passive investing, which is primarily about a long-term, calm approach, is at stake. Here, the investor does not try to predict short-term market movements or select individual stocks. Instead, he relies on the principle of replicating the entire market or a broad index as precisely as possible. The principle is called “Indexing” -Investing in ETFs that reproduce a specific index, such as the DAX or the MSCI World, is invested. The goal is to achieve the average market return as far as possible without having to constantly intervene. The strategy is based on patience, continuity and the belief that markets are rising in the long term. The investor buys his ETF portfolio once and holds it for many yearsSometimes decades without constantly shifting. This approach requires discipline and perseverance to remain calm even in phases with price drops.

Buy and Hold: Invest and wait for the long term

The so-called “buy and hold” is the core principle of passive investment. It means that the investor buys his ETFs, leaves them in the portfolio and waits for the development of the market in the long term. Instead of constantly reacting to price changes, he trusts that the markets will rise in the long term. This strategy is less exciting than constant observation andRespond on the market, but statistically offers significantly higher chances of success. Studies show that investors who hold their ETFs for at least 15 years usually achieve the average market return and losses occur only in very rare cases. Long-term maintenance helps to sit out short-term fluctuations and benefit from the so-called regression to the middle,A statistical phenomenon that states that extreme deflections decrease up or down over time and approach the mean. This makes it possible to achieve stable returns over long periods of time, which reflect the average market value.

Long-term data underpin the success of the passive approach

Looking at historical data, it becomes clear that the passive approach is much more successful in the long term than active trading. An analysis of the MSCI World Index shows that investors who invested in the index for at least 15 years almost always made profits, regardless of the exact entry point. Even in the case of unfavorable times, such as the 1973 stock market crash or theFinancial crisis in 2008, you could ultimately generate positive returns by holding it for a long time. The average annual return was around 7 percent, with fluctuations becoming smaller and smaller after a longer holding period. Even the worst time windows brought positive results after 15 years. After 40 years, both the best and the worst portfolios have asimilar yield of around 6 to 8 percent. These figures impressively show that patience and continuity in investing make the decisive difference in the long term.

Benefits of passive investing: less stress, tax advantages and long-term success

Another decisive advantage of passive investing is tax benefits. Since investors usually last for many years, they benefit from the so-called tax deferral effect. Profits that are realized when the positions are sold are only taxed when the investments are dissolved. This means that the capital during the holding periodcan continue to grow without being diminished by tax payments. In contrast, active traders have to pay regular taxes on their short-term profits, which diminishes the return. In addition, passive investing is significantly less time-consuming and less nerve-wracking. It does not require constant observation of the markets, no short-term reaction to price losses andNo permanent shifts. Instead, the strategy is done through a one-time decision, combined with discipline and long-term patience. This approach is particularly suitable for investors who want to build up long-term wealth without wanting to deal with stock market news on a daily basis and who rely on a proven method to minimize risk and stableto achieve yields.