Active vs passive investing is a hotly debated topic. What does it all mean and why is it important? (2:40 min read)
This information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs.
What’s the difference between active vs passive investing? Despite being one of the most hotly debated topics in the world of investing, it’s often one of the most deeply misunderstood. Here’s a simple guide to help you navigate the noise.
Active vs passive investing in simple terms
Let’s step out of the investing world for a moment, and picture yourself somewhere arguably more enjoyable – a restaurant.
It’s one of those places with a menu equivalent of an encyclopedia (so everything must be good, right?).
There will likely be some underwhelming dishes in among the standouts, but you figure the restaurant will make decent food on average so you proceed to order everything on the menu.
This is passive investing.
Your dinner date on the other hand, wants to skip straight to the top dishes on the menu. They order only couple of items as recommended by restaurant staff based on a range of culinary factors.
This is active investing.
Swap the menu for a stock exchange, menu items for stocks, restaurant staff for fund managers – now you have the active vs passive investor battleground.
But is it really that simple? While the restaurant analogy is useful for understanding the fundamental concepts, it’s a little more nuanced in practice.
Active vs passive investing in practice
Active and passive investors view the market very differently.
Most passive investors think trying to outperform an index or industry benchmark is futile, and opt for following it instead – buying all or most of the stocks within an index like the S&P 500 (tracks the performance of the largest 500 companies listed on US stock exchanges).
An active investor sets out to achieve better returns than a particular index/benchmark by being more selective about which companies are worthy of investment.
Naturally, advocates from both sides want to convince would-be investors their style is superior – handpicking statistics and research, or even placing high-profile bets to make a point.
Which one is better?
It’s important to not get too caught up in the debate, and always start with your individual needs and objectives as there’s no silver bullet option.
There are cost-effective active funds, just as there are passive funds which aren’t so passive i.e. there’s an element of stock picking involved.
Once you look beyond simply what separates active and passive funds, it allows you to consider the more important factors like your investing horizon, risk appetite, and fees involved versus the potential returns.
You’ll organically find where you sit along the active-passive spectrum once you’ve established some of the above.
We like to keep things active here at AtlasTrend, using a combination of big data technology and humans (with a combined 50+ years’ experience collectively managing $2 billion worth of funds) to guide our investment strategy.
Our funds are actively managed because they’re built around the world’s megatrends, and not all listed companies within an index are driving or creating these trends.
It allows us to invest in the companies impacting how we live now and in the future. If you’re curious about which companies are having the most impact, sign up and unlock our portfolios.
Membership is free for 30 days, and you’ll get a sense of what it’s like to be an active investor.
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