The Ostrich approach to investing is one strategy, this idea and behavior that the manager takes up also comprise of the passive as well as the active investing.

Comparing the last two, active investing includes the continuous buying and selling of securities. On the other hand, passive is the complete opposite. Where the active investing aims the short term changes inside the stock market, the passive investing is only a buy-hold strategy.

As for the ostrich effect, it is a way of ignoring the bad news inside the market and is displayed both in the active as well as passive investors. Below, we will be discussing the differences and the dangers of ignoring what revolves around the market.

Passive (Index) Investing:

This is an investment approach that buys and sells the security in long term basis. The individuals in this approach are usually of the belief that the stock journeys up in the long run. These individuals focus on matching the market return and therefore, usually invest in index funds and exchange-traded funds (ETF).

The index investing may be advantageous in following ways:

1. Since passive investing uses fewer resources and time, there are lower costs involved.  In a situation where both passive and active portfolios yield same return, then the passive is bound to earn higher returns than the other player.
2. As compared to the active portfolios, passive portfolios yield more return, since they follow the market benchmark performance rather closely. Example of such market benchmark includes cases like the S&P 500.
3. As the passive portfolio automatically tracks all changes on the index, there is a reduction in the management levels. Therefore,  the probability of bad decision affecting the investment also reduces to a significant level.

As for the disadvantages, the passive investing includes the following points:

1. As the passive portfolio Automatic directly mirrors the market, every downturn sends a turmoil in the portfolio which is then followed by a loss for the investor.
2. Outperforming the market is a far cry for the investor and so, beating the market in a passive portfolio is the wrong way.

The Ostrich Effect:

Pretending like nothing happened to be the exact definition of the ostrich effect. As this term includes the name of a bird, it becomes apparent that the way an Ostrich buries its head in the sand; the investor ignores the worsening conditions of the market in the same way.

Advantages:

First is a support to the emotions as there is left a lesser chance of a bad news. Of course, there is also an advantage from the market cycles. As their graph is constantly on the move, the investors sell in the downward phase and buys in the upward phase.  In this way, they save themselves from any unnecessary losses but also miss several positive returns when it turns good.

Disadvantages:

1. As this effect revolves around the word ‘ignore’, when an investor might ignore the bad news, things would obviously go the wrong way. Hence, Ignorance would lead to even major losses.
2. Higher risk means higher returns. Therefore, when you bury your head from a bad news, you might miss out a greater opportunity.

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