What do you need to know when Investing – Active v Passive? Active investing is generally more expensive. While passive investing may appear more simple, investors should always consider their goals and have a clear strategy before deciding.
The discussion around index investment strategies or active and passive investment strategies is more complex. It is important that investors consider their long-term goals when deciding which path to take rather than matters of ease and fees.
The low-cost nature of index investing (investment managers follow the performance of a selected index) has grown in appeal over the last 10 years. This has seen people be a lot more willing to consider passive investing strategies.
It may be a concern. Because at the end of the day, you are investing in that index which is going to be made up of whatever investments or assets or companies are in that index. Therefore, people might not understand the true makeup of their investments.
Investing – Active v Passive cont
I think a lot of people possibly don’t understand what they’re doing when Investing – Active v Passive. And don’t understand the risks. In so, they might be inclined think.. “Well if I put my money into a low-cost index fund which covers the all ordinaries index in Australia (or whatever), it won’t matter if I don’t have a sound strategy behind it.’ Which obviously can be risky.
To be clear, there’s nothing necessarily wrong with passive investing. Just as long as it ties in within an investment strategy and works towards meeting ‘your’ goals.
Which approach is needed when investing?
Take an example, an income objective where you’re entering retirement. You then need to make sure that your strategy is going to be able to pay you sufficient income for the rest of your life. Maybe it can, maybe it can’t.
If you’re actively investing yourself, do your research. If they’re not performing, obviously you’re not going to keep investing with them. What could happen is, you just keep paying fees, that you will eventually resent. You’ll probably think about relocating to another fund or another investment manager. All of this is time and energy draining.
Investors should have conversations with their advisers about the nature of the underlying investments. Whether in an index fund in a income producing or growth investments area.
With this knowledge, investors and their advisers can then consider which path will best take them where they need to go.
We all know investing is a long-term game and sometimes, by following the herd, you can do well in the short term, eg. popular investments such as the technology companies like Apple, Google and Amazon etc. Some of these stocks are really riding a wave with the moment and if you’re not investing in those maybe you’re under performing? But at what cost is it now to get in? Perhaps there is another up and coming section or stock that is a good purchase right now.
But what if there is a correction?, (and I’m not saying this is going to happen,) but everything in life has it’s ups and downs. A good manager who hasn’t gotten carried away with the herd, their value (and your’s) will eventually be rewarded for that.
Given this, you as investor need to ensure that your investments, your investment decisions and your rationale behind them add up and are in line with your short and long term goals.
So don’t make a decision in a short period of time because investing is really a minimum of a five-ten plus year time horizon. Sometimes certain investments can under perform in the short term but over the long term you’ll be rewarded.
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Disclaimer: This article is factual information only. It is not intended to imply any recommendation about any financial product(s) or to constitute tax advice. The information in the article is reliable at the time of distribution, but may not be complete or accurate in the future.