Check out some overlooked factors from the long-standing active vs passive investing debate. (3:13 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.

 

Why is active vs passive investing such a hotly contested issue? Despite both sides arguing it’s their way or the highway, there’s room for both approaches in a smart investor’s portfolio.

We initially covered the basics of active vs passive investing – where investors choose to track a particular market/index or try to outperform it – and figured it was time to dig a little deeper to highlight some often-overlooked aspects of the debate.

Ultimately, both strategies are geared towards helping people to build wealth, and the line dividing them is becoming increasingly blurred.

While the argument might carry on for some time, we think there are more important factors to consider when determining how to go about building long-term wealth with purpose.

 

Investment vehicle vs values

Your capital drives impact – whether it’s via funds you invest in, stocks you own, or brands you chose to spend your hard-earned dollars with.

Take the time to consider where your money is being invested, because it’s useful to know if the impact you’re driving aligns with what you care about.

This is particularly crucial if you’re investing for the long term, since your investments can be a reflection of the world you want to live in once the returns are realised.

Index funds, for all their low-cost merits, are usually too broad-based to weed out companies based on your values, interests or beliefs.

There’s a good chance you’ll find fossil fuel and tobacco companies littered throughout them, and we can comfortably assume positively contributing to society isn’t high up on their priority list.

The CEO of Blackrock, a global investment company with over $6 trillion in assets under management, is thankfully calling for public companies around the world to lift their game on this front saying:

“Society is demanding that companies, both public and private, serve a social purpose. To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society. Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.” – Larry Fink

 

Active management & financial literacy

Why do we invest in some companies and not others? The rationale behind these decisions can take your investing know-how to the next level.

It’s a more contextual way of understanding the world of investing, and active managers tend to employ more comprehensive methods you can learn from that guide their investment decisions.

They conduct deep fundamental analysis on companies, so you know exactly why they’ve invested in them or will steer clear for now.

You could almost split it into a few parts – all presenting an opportunity to build on your knowledge:

The initial analysis

  • how does the company make money?
  • certainty of its forecast earnings
  • near term and long term competitive threats
  • track record of the management team
  • who are the key customers?

Buying and selling

Rather than trading in a stock because it forms part of a index and the rest of the market is, all of the above factors and more are taken into account by active managers when looking for opportunities to buy and sell a stock at an opportune time based on valuation.

The ongoing management

Active management is not a set-and-forget approach.

You have to constantly take into account macroeconomic factors (what’s happening around the world that can impact the share price) to maximise returns and reduce risk.

For instance, a global event occurs and the whole market is selling out of the stock driving down the price.

Would you want to follow the market to sell out if the company has fundamentally strong growth prospects, earnings that are not impacted by the event, and you believe in its future potential?

Given AtlasTrend’s managed funds are actively managed, we don’t have to follow the pack.

But the lesson here is not that you have to choose one or the other, it’s to not focus on the active vs passive divide and rather where you can get value beyond just fees and performance. Like with many decisions, it comes down to your personal goals and values.

 

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About Jade Ong

Jade Ong is a Co-Founder of AtlasTrend, an investment platform that makes it easy for anyone to learn and invest in trends impacting our world. Jade has over 15 years experience in financial markets including roles at Macquarie and IAG Asset Management.