The debate about whether a passive or an
active investment strategy produces a better return for investors is one that
has rumbled amongst financial planners for as long as passive strategies have
been in existence. For you as a client, the method favoured by your adviser can
have a major impact on your investment experience, so understanding the two
different approaches is important.
An active strategy is one in which the
investor – possibly a fund manager or other investment professional – will make
investment choices on a regular basis, buying or selling holdings when they
think it is necessary, often when they believe they can make a peak profit. An
active strategy is highly involved and requires constant management.
A passive strategy meanwhile is one which
requires hardly any trading whatsoever. Instead, money is invested into funds
linked to indexes, such as the FTSE 100, by way of just one of many possible
examples. Relying on the market to make your gain, passive investing is
typically seen as a longer term strategy and, although it may sound easier than
active from a management point of view, there is still a lot to do in terms of
selecting the right funds and creating a well-balanced portfolio of asset
classes that meet client’s needs.
On the active side, proponents claim that
such a strategy is the only way to generate better-than-average returns; the
only way to ‘beat the market’. After all, passive strategies, though divested
across indexes and asset classes, are by their very design market-linked. If
the index your passive strategy invests in goes up, so will your investments,
with the negative being true if the index falls. Your investment may never
outperform the market but it will also never lose more than the market as a
Passive proponents, meanwhile, point out that active investment strategies typically cost more in fees, with these fees potentially impacting on the ability of the strategy to produce a better return. Those who favour passive investments also point out the increased volatility of active strategies, stemming from the higher frequency of investment movements and the timing of those movements, which also produce the potential for market-beating gains.
- John L Taylor DipPFS, Certs CII (MP & ER)
- Whitehall Partnership
- 01384 946 000
- 07977 985 306