This contest is worthy of the tortoise and the hare, except real money is involved. Active versus passive investing — which is the best way to grow one’s money? Like many things in life, the most accurate answer is, “It depends.”

In the Aesop fable, the hare sees a slow-moving tortoise and mocks the tortoise’s lack of speed. The tortoise then challenges the hare to a race. The hare sprints out to a huge lead and decides there’s enough time to squeeze in a nap. While the hare is snoozing, the tortoise trudges on toward the finish line, ultimately winning.

Does investing have parallels? One might describe an active investor as the hare, constantly buying and selling, trying to beat the market. The passive investor would be the buy-and-hold tortoise, plunking their money into a conservative investment and leaving it there to grow, slowly but steadily.

It’s really more complex than that; it might also be described as man versus machine. Some experts define an active investor as one who relies on human judgment, trying to find inefficiencies in the market that can be exploited. The passive investor follows a strict formula for selecting investments and for choosing when to buy and sell, leaving the human factor, and its attendant emotion, out of the equation.

That brings one more comparison to mind: Kirk versus Spock. The hot-blooded Star Trek captain would definitely be an active investor, buying and selling quickly, using his ingenuity to react — and sometimes overreact — to market trends. Spock, meanwhile, would lead with logic and avoid quick adjustments to new data, a passive investor whose calculated plan would not allow short-term market fluctuations to obscure his ultimate goals.

But enough with the analogies. The fact so many can describe the debate between active and passive investing demonstrates how complicated the relationship is between the two philosophies. In fact, some investment strategies can be executed passively or actively.

Business Insider describes passive management as a strategy that follows the belief that the market will always grow over the long term. Investments are made to match that growth, not beat the market. It’s described as involving longer-term investments and less trading. The ultimate passive stock investment would be an index fund that matches the S&P 500 or Dow Jones Industrial Average.

Index funds are similar to mutual funds in that an investor is purchasing a basket of stocks and/or bonds and/or commodities instead of one specific stock. A widget index fund would buy stock in just about every widget manufacturer, as well as perhaps some raw materials suppliers or distributors/retailers of widgets. Trades within the fund are typically only made for balancing, to match changes in company market capitalizations. CNBC describes index funds as passive alternatives to mutual funds.

Actively managed investments can involve mutual or index funds, or a mix of stocks, bonds, and other instruments, according to The Wharton School at the University of Pennsylvania. The difference is the goal, which is to beat the market. The benefits of active investing include the flexibility to buy, or not buy, particular stocks; the ability to hedge against losses through short selling, puts, and other complex activities; customization to a particular investor’s risk tolerance or tax situation; and even the ability to avoid risk by liquidating particular stocks or sectors.

While active and passive lead to assumptions about trading volume, the difference is not as black and white. If an active investor is holding a bunch of winning stocks during a bull market, they can choose not to sell until they believe they see the peak. Meanwhile, a passively managed fund is going to be periodically rebalanced, regardless of whether the market is up or down.

Earlier this year, two University of South Carolina professors, M. Vahid Irani and Hugh “Hoikwang” Kim, published a paper that looked at institutional investors. Institutional investors are large organizations with investable assets, such as pension funds, university endowments, or insurance companies. The USC researchers found that when the portfolios of institutional investors were inactive over extended periods, they tended to underperform the market.

By the same token, Berkshire Hathaway, Inc., could in some ways be considered an institutional investor, as its primary business is insurance and it invests the premiums it collects. Its chief executive, Warren Buffett, is known for saying “our favorite holding period is forever,” and he has parlayed long-term positions in brands such as Apple and Coca-Cola into celebrity status as America’s wisest investor.

Buffett is known for following a value investing strategy — investing in companies the stock of which appears to be underpriced. If the value investor is correct, the stock will appreciate at a higher rate than the market. That sounds like active investing.

Or is it? Holding a stock for forever sounds passive as does sticking to a simple mathematical rule, and Buffett likes to focus on price-to-earnings ratios.

But where does Buffett draw the line on the price-to-earnings spectrum to determine whether to buy a stock? That takes human judgment. One way to be a passive value investor is to buy shares in one of the index funds that tracks value stocks. However, Institutional Investor reported that returns vary widely among those funds, indicating differences in judgment behind those passive strategies.

Sometimes Buffett earns a quick profit from a company and moves on. Perhaps his secret is that he knows when to be active and when to be passive. Berkshire Hathaway has grown into a superconglomerate through Buffett’s astute investments, and its Class A stock sells for the price of a nice home in Shandon. The company has become so reliable, other institutional investors invest in it. But perhaps Berkshire’s, and Buffett’s, fame is indicative of the uniqueness of his success.

Dollar cost averaging is a hybrid investing method popular with mutual fund investors. Instead of buying $1,200 worth of shares in Fund A on Jan. 1, this strategy would have the investor buy $100 worth on the first trading day of each month throughout a year. The investor then holds the shares with the expectation of long-term appreciation, while collecting dividends. Purchase-price highs and lows might be spread out, insulating an unlucky investor from mistiming the market. Deciding what to purchase using this method involves human judgment, but the rule on when to buy and how much to buy follows passive principles.

The most extreme example of active investing might be day trading. A day trader might hold a stock for only a few minutes and make a trade that earns them only pennies per share. Why do it? If they’re trading 1,000 shares at a time, and they’re making several trades per day, sizable gains are possible. They might even be trading with borrowed money to increase their buying power. For some, it’s a form of entertainment similar to the thrill of sports betting.

The U.S. Securities and Exchange Commission warns investors to be cautious about day trading, especially with borrowed money. Its fast-paced nature and sophisticated tactics, combined with the potential for emotions to become involved, can lead to big losses. It’s not a place for the hare to be caught napping.

Many academic researchers and financial advisors conclude active investing is a fool’s errand. It’s impossible to time the market, they say, and regression to the mean will doom any hot streak. It’s the essence of the buy low, sell high mantra, so investors need to be right twice — once when they buy and again when they sell. An active investor may regret earning 10 percent on the sale of a stock that ultimately doubled in value. Worse, they may “catch a falling knife,” and purchase a bargain stock the price of which drops further still. Emotion-clouded decision making is why terms such as recency bias and the sunk cost fallacy exist.

Besides, they say, individual investors can’t navigate the massive amounts of information necessary to make the right decisions consistently. Who can? Fund managers who control multi-billion-dollar portfolios and have teams of researchers crunching numbers and running scenarios. Numerous mutual funds are actively managed, trying to capitalize on short-term fluctuations in stock prices. Most professional day traders work for financial institutions or hedge funds. They don’t have to be perfect, but they have to be right more than wrong.

Alas, research by Standard & Poor’s illustrates how hard it is to beat the market, even for a team of statheads. Its annual look at fund performance showed in a down market that might have been ripe for opportunity — the S&P 500 had a negative 18 percent return in 2022 — a majority of active managers underperformed in most fund categories.

Mutual fund management points out a conundrum facing would-be passive investors. There’s a difference between passive and conservative. One can plan long-term investments in large, well-known mutual funds with management philosophies that may not be passive.

Dalbar, Inc., is a research firm that produces an annual analysis of investor behavior. It found the average equity fund investor finished 2021 with a return of 18.39 percent versus an S&P 500 return of 28.71 percent, as reported by Retirement Income Journal. However, a long-term study by Invesco covering 1998 - 2014 found 61 percent of active managers beat their benchmarks.

Another pitfall of active investing is cost. If a stockbroker is taking a fee every time a retail investor makes a trade, capital gains need to exceed that to be worthwhile. Actively managed mutual funds typically charge fees between 0.25 percent and 1 percent annually of the amount invested, according to Nerdwallet, and usually have higher fees than passive funds.

Investopedia states that passive investing is both more popular than active investing and more successful. The Securities and Exchange Commission recommends investors understand their financial goals and risk tolerance. They suggest a long-term strategy and point out that a diverse portfolio of stocks, bonds and cash reduces risk.

Ultimately, the debate comes down to risk tolerance and individual skill. Active investing might be more appealing for the individual investor who has a greater appetite for risk and greater belief in their judgment — or that of whom they rely on. There’s always a chance for big losses, so it’s not a place to invest next month’s mortgage payment, financial advisors say. Passive investing might be more appealing for individuals with lower risk tolerance who would rather see their money reliably grow a little than simply sit in their piggy bank.

But the debate doesn’t have to be all or nothing. Some financial advisors recommend a mix of active and passive investments set to ratios that depend on what the investor is saving for and how much time they have before they need to convert an investment to cash. This not-too-active, not-too-passive strategy brings to mind one more analogy — Goldilocks. Just beware of the three bear markets!