You may have heard the phrase ‘passive investing vs active investing’.
Typically in some kind of article or even an argument, some are advocates of active, some are advocates of passive.
For investors, it’s important to understand the fundamental differences between these two common investing practices.
What Is Active Investing?
Some investors or fund managers may look at active investing with a goal of “beating the market” and outperforming specific standard benchmarks.
In order to do this, investors may follow investment trends and buy or sell as investments rise and fall.
Investors may actively invest in assets such as:
- Funds
- Exchange-traded funds (ETFs)
- Portfolios
The general idea surrounding active investing is that if things go well with your investments, you may be able to outperform the market:
This is even after including the fees you pay to a fund manager or stockbroker.
You can’t however, guarantee performance.
Active Investing Considerations
Stock Picking
A person (or team of analysts) may be picking individual stocks or sectors of the market to invest in.
Certain regions and industries.
Fees and Performance
Due to the ongoing active management, this can incur higher fees than those who follow a passive investment strategy.
Because of this, an investor would want to beat passive equivalents by a certain percentage in order to make paying the higher fees worth it in the long run.
What Is Passive Investing?
By practising passive investing, you aim to maximize your returns while minimizing the amount of buying and selling that you do.
With this strategy, investors typically buy and hold their stocks etc in passive funds or passive index funds.
These funds rise and fall to match the performance of certain indexes.
Due to this, passive investments are not meant to beat or outperform the market, but rather match the market’s performance.
Passive Investing Considerations
Potentially Lower Fees
Because passive funds don’t have such a hands-on active human component to them, they tend to incur fewer fees than active investments.
Transparency
An investor will know exactly what stocks etc their indexed investment contains.
For some, this transparency and consistency is comforting or reassuring to know as they work toward their long-term financial goals.
So passive investing vs active investing, Which Is Right For Me?
Some investors may find a mix of both active and passive investments the right move for diversifying their portfolio.
With the lower fees passive investments tend to incur, passive funds may be an appealing option for investors.
Alternatively, for investors who like to know someone is actively managing their investments continuously, the active approach may be more suitable.
How we help
We will review your portfolio and confirm to you that you are invested actively, passively or a mixture of both.
If you wish we can dive deeper into the age-old active versus passive argument.
You can find out more about our investment philosophy here.
Request a callback or drop me an email, francis@fortitudefp.ie.
Francis McTaggart CFP® SIA RPA QFA
Disclaimer: All content provided in these blog posts is intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
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