A heated debate over the benefits – and drawbacks – of active and passive investment management has been a constant in the investment world for years. Supporters for active investment focus on the potential for high returns, while passive investment fans focus on low fees and simplicity in portfolio construction. At Jones Hill, we understand the need for both, but we want to shed some light on the differences.
Confused about how active or passive management fit into your investing goals? We’ve got you covered.
The Lure of Active Management
Active investment managers put together a mix of investments meant to outperform the broad market. They may look at economic factors, sector or company research, and market trends to pick and choose which investments to include in a portfolio. These strategies are based on one tempting principal: to beat the market (or appropriate benchmark).
While active management is attractive on its face, the strategy comes at a cost. Actively managed funds are more expensive than their passive counterparts which ultimately eats away at your returns. To add to the pain of active management, most managers fail to outperform the market – especially when it comes to core holdings like large company stocks. If you don’t feel like spending your time chasing returns, active management probably isn’t for you.
Logic in Passive Management
On the flip side of the investment coin is passive management – a portfolio strategy that uses simple tracking of an index to generate investment returns. Passive managers don’t try to reinvent the wheel; instead, they select the same stocks found in a particular index, for instance, the FTSE 100, and put together a portfolio that mimics those holdings.
Because passive management doesn’t include in-depth research or ongoing buying and selling in an attempt to boost returns, investments here are much less costly. Instead of focusing your time and energy on chasing unrealistic returns to make up for fees, you can sit back, relax, and know your investment is using proven logic to give you a respectable return over time.
Who Wins the Investment Debate?
Both active and passive investment styles can help you reach your investment goals, but there is a clear winner in certain situations. Passive investments are a smart choice for your core holdings since history has shown us that active investments simply don’t live up to the performance hype. However, adding low-cost active investments as a small portion of your portfolio gives you access to specific sectors or certain market trends, potentially enhancing performance.
At Jones Hill, we are strong supporters of the low-cost, sound investment strategies represented by passive management styles. But we also understand how active management can play a small part in your overall portfolio design. If you want an expert to help you navigate the world of active versus passive investment strategies, contact us today.
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