There are two schools of thought over whether active vs passive investing is best. The majority of experienced investors or wealth managers will prefer one strategy over another. What does each strategy entail and what could it mean for your investment and wealth-building plans?
In this article we will discuss:
- What is considered active investing?
- What is considered passive investing?
- The difference between active vs passive investing
- Things to consider
The Difference Between Active vs Passive Investing
What Is Active Investing?
Active investing refers to, as its name suggests, a more hands-on approach to investing. This can be via yourself as an accomplished investor or via an investment portfolio manager.
In this approach, there is continual buying and selling with close monitoring of the market, the aim being to make quick decisions that exploit sudden shifts in conditions. In this way, the investor tries to ‘beat’ the market and make rapid financial gains.
What is Passive Investing?
Passive investing is the reverse of active investing. Following a passive strategy means investing and holding on to these investments for the longer terms and patiently waiting for them to gain value.
It involves minimal trading in the market and holding on to investments even when the market becomes volatile and investments lose value. The focus is on making small earnings over time across a diverse number of investments.
Pros and Cons of Active vs Passive Investing
The easiest ways to see the differences between active and passive investment is to compare their pros and cons.
Active investing gives you the ability to sell investments that are underperforming and jump on opportunities when they present themselves.
- Intelligent tax management
While you may make some capital gains, these can be offset by selling underperforming investments and balancing the losses and gains.
Active investing allows fund managers to hedge their bets and sell when risk becomes too high. With passive investing, you are stuck no matter how the investment performs.
- High fees and expenses
These are part and parcel of an active investment strategy and the associated transaction costs. Thomson Reuters Lipper pegs the average expense ratio at 1.4% for an actively managed equity fund, compared to only 0.6% for the average passive equity fund.
- High Risk
The ability to buy and sell rapidly can bring great gains but could also spell disaster and huge losses.
- Low fees
Without constant transactions, there are fewer fees involved.
- Lower taxes
Lower capital gains mean fewer taxes to pay each financial year.
- Clarity and transparency
Passive investing makes it easier to see where you’re investing and how those investments are performing.
- Low risk
Passive investing is a sure and steady approach that comes with significantly less risk than active investing.
- Slow and low returns
Passive investing won’t provide a sudden influx of earnings and any earnings will usually be on the lower side when compared with high-risk investments.
Choosing to lock your investments in a passive strategy means you cannot jump on opportunities that present themselves.
When choosing between active vs passive fund management and comparing the pros and cons, it may seem as though active is the best way to grow your wealth. However, many studies, conducted over decades, indicate that passive investing works best for most investors.
This doesn’t necessarily mean that active investing is ‘bad’ or worse than passive investing, it just shows that sometimes slow and steady does win the race! During times of high volatility in the market, active investing can still make you some great wins and help you shed underperforming investments before large losses are incurred.
Ultimately passive investing vs active investing will come down to the investor’s personal preference and their willingness to take a risk.
Where to Seek Expert Advice on Active vs Passive Investing
At Collins Mann, we offer intelligent, targeted advice on wealth management and growth. We can guide you through your options for active vs passive investment and help you make the right decisions for your situation.
Our goal is to help you live a life of choice without compromise both now and into retirement. We do this through investment advice, retirement planning, superannuation strategising and more. Our fully qualified financial advisors are the experts in helping you create the financially secure retirement you dream of.
To discuss active vs passive investing or seek expert financial advice, contact Collins Mann today on 07 3251 3200.