What is the difference between "active" and "passive" investment management?

Active investment management is characterized by a strategy where managers make frequent trades to capitalize on market inefficiencies and to attempt to outperform market indices. This approach involves a higher level of research, analysis, and decision-making, as managers actively choose which securities to buy and sell based on their expectations of price movement.

On the other hand, passive investment management focuses on replicating the performance of a market index or benchmark rather than trying to outperform it. This strategy typically involves holding a fixed portfolio over time and making fewer trades, which often leads to lower costs and reduced transaction fees, as it avoids the ongoing alterations associated with active management.

The distinction highlights how active managers seek to achieve higher returns through tactical decisions, while passive managers aim to achieve market returns with minimal changes to their portfolios. Understanding this fundamental difference helps investors recognize the differing approaches and philosophies behind each investment strategy.