Active versus Passive Investing
Recently there has be a considerable amount of media exposure on the subject of active versus passive investing. It really comes down to your personal view and what will best suit your investment goals. It’s important to consider whether your investing for the long term or want to make some short-term gains. Either way, coming up with a clear plan for your investments course will help you reach your investment goals. Here are a few comparisons between active and passive investing to help navigate that course and see if they align with where you are headed. Diligent Wealth are always here to help navigate and fine tune that course with you too.
Active investing is what has historically been known as investing, the purchasing or sale of individual stocks or bonds. You can do this individually on the stock market or in more recent times we have commonly seen consumers putting money into large mutual funds that have fund managers who make those day to day or case by case buying or selling decisions on your behalf.
The aim of these fund managers is trying to actively beat the market. Therefore, these fund managers are watching and assessing the market and making the trades necessary to try and stay ahead. They may also have access to products that you may not have access to on the standard markets. If they are successful, this will likely see higher than average returns. Although you should consider, with this approach to investing it usually involves a higher level risk.
Investing through a fund manager you are placing a high level of trust with their abilities and insight and have to remember that they don’t have a crystal ball and can't see the future so they may sometimes invest in under-performing securities or misread the market. It is highly recommended you do some research about who the underlying fund managers are of these active investment funds to understand their credibility.
These funds also generally have fees associated with them to cover the management and administration. You are also recommended to undertake a comparison on the different fees charged as they can vary greatly depending on the fund.
Of course it can be confusing or daunting task, so it's important to have an adviser beside you who can help identify if you have a high level of exposure to a particular sector that you weren't aware of, like tech for example. Be sure to reach out to the experts here at Diligent Wealth so we can help you reach your investment goals.
If you have a lower tolerance for risk, then you may be better suited to passive investments. A passive investment is an investment that follows indexes (this is groups of securities that are similar). Purchasing an index fund or an exchange traded fund that owns every stock in the S&P 500 would be classified as a passive investment.
You can only expect to do the same as that overall market, not come out better or worse off. Generally a passive investment will be attractive to those looking to invest over a long period of time, during that time the market will fluctuate and may see quite a variation in the value of the investment but generally as you are not buying and selling frequently it will see out the peaks and troughs along the way.
As opposed to the active fund’s fees I discussed earlier, often the passive investment funds will have a lower overall fee as they don’t involve the same amount of work to administer and manage. Some funds may have downside protection strategies that smooth the returns in event of large shocks (like we have seen with COVID-19) so they are tracker plus protection. Or if you have gone for a simple tracker, you should also look at a protection fund such as insurance.
With passive investing its equally important to have one of our advisers here at Diligent Wealth help guide you and help make the right decision of where your money is best invested.
“When markets become volatile, the agility and flexibility of active management can become a competitive advantage. Kathy Carey, director of research at wealth management firm Baird, explains, “The last bull market favored U.S. large caps. That was a good time to be in a low-cost, passive investment that was participating in the market’s movement. But when you have the kind of volatility like we’ve seen recently, that passive investment is going to participate in all of the downside.”
Carey adds, “Unlike passive funds, an active manager can choose not to invest; they can hold cash until they see opportunity. That kind of flexibility gives them an advantage because they can wait until the market goes lower to reinvest.”
The COVID-19 pandemic has exposed unexpected vulnerabilities around the world. With the pain inflicted by both the virus and the markets will surely come new opportunities for growth. As with any investment plan, it pays to consider the strengths and weaknesses of any given strategy. When considering an active manager, be sure to check the fund’s active share, which will tell you whether it’s mostly mimicking an index or is truly positioned to add value over its benchmark. (Turner, 2020)”
Matt Porter, 24 September 2020
Disclaimer: This is intended to provide general information only. It does not take into account your investment needs or personal circumstances. It is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser. Past performance is not a guarantee of future performance.