Passive vs active: Choosing the right investment strategy
Posted by siteadmin on Tuesday 6th of August 2019.
When you’re investing your money through a fund, there are two main strategies: passive and active. The debate around which is the most effective way to invest your money has been raging for years. So, which should you opt for?
As with all investment decisions, it will depend on your goals and personal attitude to investing. However, it’s important to understand the difference between the two options when you’re making investment decisions. Both terms refer to how an investment fund is managed. There are more active funds available to choose from, but passive alternatives have been increasing in the last few years.
Actively managed investment funds
Actively managed funds are led by either a professional fund manager or investment research team. They actively make investment decisions on your behalf, such as when to buy into a specific company or sell certain types of assets. Those running the fund will conduct extensive research to inform their decision-making.
Different funds will have varying investment principles and focus, which you should read about before investing in an actively managed fund. However, they all aim to deliver higher returns than the market. Of course, this can’t be guaranteed, and the returns delivered will depend on those running it to make the right call.
Passive investment funds
Passive management of a fund, on the other hand, simply tracks the market. Rather than a team of people making decisions, a computer essentially runs a passive investment fund. The fund will hold all or a significant portion of assets of a particular market. As a result, the returns delivered should reflect how the overall market has performed.
Comparing the two options
When deciding between the two options, there are a few key comparisons to make that can help you make the right choice.
- Fees: First up, what fees are you likely to pay for a passively or actively managed fund? As an active fund requires people to carry out a lot of hefty research, they naturally cost more to run. As a result, expect actively managed fund options to cost you more in term of fees. In some cases, this may be worthwhile, but it’s something you should factor into target returns.
- Potential returns: What is your target return from your investment? As actively managed funds aim to beat the market, there is the potential to make a greater profit. However, relatively few managers can consistently beat the market. So, if this is what attracts you to an active investment strategy, it’s important to do your research. Whether you choose passive or active funds, returns can’t be guaranteed.
- Historic performance: Whilst historic performance isn’t a reliable indicator for future performance, it can be a useful metric when comparing different options. Looking at historic performance can help you see if the investment strategies align with your personal outlook. For example, would you prefer relatively stable, but lower returns over potentially higher returns with increased volatility?
- Responsiveness: Investment markets are affected by a huge range of issues, from geopolitical negotiations to consumer demand. A passive portfolio doesn’t react to the news to change how you’re invested. In contrast, an actively managed portfolio aims to do so. This hopefully allows the team running it to seek opportunities and avoid risk, though this relies on them making the right decision.
- Area of interest: Are you thinking of investing in a particular industry? This is an area where expert insight can add value. However, for most investors spreading investments across multiple sectors, geographic markets and risk is an approach that suits their goals and financial position when looking at an investment portfolio as a whole.
Which option is right for you?
There’s no right or wrong answer when asking which is better: passive or active investing? It comes down to your own financial situation, goals and attitude. Much like the rest of the investing decisions you make, it’s one that should consider your wider financial situation too.
For some, the potential to achieve higher returns will mean that the higher fees associated with actively managed funds will be worth it. For others, a passive fund will be more attractive. If you want to review your current investment portfolio or start investing, please contact us.
Please note: The value of your investments can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.