It’s 2025, and plenty of stock market activity is going on with our President’s change. Some stocks will respond well and others not so much. The stock market will do what it always does: go up and down and round. Sometimes, it’s like a not-so-merry-go-round that might simultaneously make you seasick and dizzy. So, what do we do?
Most 401K plans have Target date funds, and two basic types are passive and active; here’s a brief explanation.
Passive Funds
Let’s say it’s an S&P 500 Fund, which simply buys and sells the S&P 500 companies to mirror the entire stock of the S&P 500 company. They do NOT try to outperform the market. The good part about this is that it’s diversified evenly through those companies. In addition, they are also less expensive to manage because the trading is done by computer, and no real human involvement is necessary. So, when the market in general goes up or down, so does this Fund. The biggest attraction is the low maintenance cost of running the Fund.
Active Funds
Let’s say we take the very same S&P 500, but here, an investment manager(s) is in place trading on price and value, looking to maximize the returns, and might only invest in a portion of the S&P 500 companies. Here, the management cost is higher, and you’ll get or should get some downside protection and higher upside gains. This is not guaranteed, but it does put you in a potentially better position, especially if there’s more volatility in the market.
So, based on the above, the summary is passive funds have lower costs for returns vs active funds have higher costs for possibly higher returns and some downside protection.
Unfortunately, stock returns are subject to loss.
As always, seek the advice of your financial professionals before implementing any method on your own.