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Active Vs Passive Investment – A Comparison

13/02/18 Wealth Management

Investment funds are often categorised as active or passive (also known as index). These are terms you may hear your adviser use or read in the press so we thought it best to explain them in more detail.

Active Investing, as its name implies active investing takes a more hands on approach. It involves a more in depth analysis and expertise and requires someone in the role of fund manager.

An active fund manager makes decisions over holding one specific investment over another in an effort to beat the market or their chosen benchmarks. Passive investing basically just tracks the market, often using an algorithm, there is no ‘active’ intervention. An investment portfolio is selected to match the market rate of return. Passive funds require less intervention (effort) than active and enjoy smaller fees as a result.

There is a mass of research and analysis comparing the active with the index (passive) approach. Much of that analysis is influenced by bias, one way or the other, but overall the research shows that the average active fund will do worse than the market (and passive funds) because of the higher fees.

To complicate things further there is also a hybrid approach available. They mix an appropriate level of active and passive investment. This approach requires a matching of clients needs with exposure to the correct level of risk with reasonable fees.

When constructing an investment plan the decision to follow the active, passive or hybrid approach depends on your experience of investing (if any) your attitude to risk and capacity for loss.

 

This blog is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investment or course of action. The past is not a guide to future performance. The value of investments can go down as well as up and you may not get back the full amount you invested. Tax and financial regulations can change. Any figures quoted above are correct at the date of publication.