Active Vs Passive Investment – A Comparison

Investment funds are often categorised as active or passive (also known as index). 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, there is no ‘active’ intervention. A 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 a bias, one way or the other, but overall research shows that the average active fund will do worse than the market (and passive funds) as the result of higher fees.

There is also a hybrid approach available mixing 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.

The decision to follow the active, passive or hybrid approach depends on the individual, their experience of investing (if any) their attitude to risk and capacity for loss.

 

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance. 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.