active vs passive investing

What is the difference between active vs passive investing?

 

And, what do you need to know when Investing?

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.

 

Active vs Passive Investing 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 active vs passive investing 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 and the merits of active vs passive investing in relation to their long and short term goals. And, whether in an index fund in a income producing or growth investments area is right for them.

With this knowledge, investors and their advisers can then consider which path will best take them where they need to go.

Popular Investments

 

Popular Investments

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? Everything in life has it’s ups and downs just as the stock market oes through cycles. A good manager who hasn’t gotten carried away with the herd, their value (and your’s) will eventually be rewarded for that.

 

Active vs passive investing

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.

 

👀 I wrote an article about the benefits of staying invested, I talked about the Law of Compounding. Both topics are very relevant to active vs passive investing. I will leave the link below for you to see how these startegies all tie in together.

 

💡 If you need more information or help to establish if a active vs passive investing strategy is right for you to build your wealth, contact us today on 08 7111 0022 or book a chat to see how we can best help you here

 

Arthur Panagis
Author, Founder, Wealth Coach and Financial Strategist

B.Bus (Accountant)
Grad Dip (Financial Planning)
Professional Certificate in Self Managed Super Funds
ASX Listed Equities Accreditation
Tax (financial) Advisor

 

REMEMBER, action is power!

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👀 You can read about how the Law of compounding works here

 

 

 

 

 

 

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Past performance is not a reliable indicator of future results.

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. For information about a loan that may be suitable for you, call us on 7111 0022.

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