The age-old debate: Which is better – an active or passive investment strategy?
The debate about active and passive investment strategies is one that has rumbled on since the 1970s, when passive investment funds were first launched. As this can have a major impact upon your investment returns, understanding the difference is key.
An active strategy is one in which the investor, typically via a fund manager, makes investment choices on a regular basis, buying or selling holdings when they think it is necessary, often with the belief that this will outperform the market. You therefore have the potential to generate better than average returns, although you could also potentially lose more. This strategy requires ongoing management which explains why it is more costly.
A passive strategy, on the other hand is low cost, as it requires very little management and trading. Your monies are invested into funds that are linked to indices, such as the FTSE 100. In linking yourself to an index, you are relying on the market that you are ‘tracking’ to increase in value.
In recent years, passive investing has grown in popularity although you can easily make the case for active management, particularly in periods of market stress. Generally speaking, in periods of uncertainty, active strategies have helped investors improve returns on a risk adjusted basis. Passive strategies become better value when the market becomes more correlated.
Most financial planners offer both investment strategies and this is only one factor that should be considered. Thought should also be given to the tax structure, the level of risk adopted, the underlying asset mix and the costs involved.
Should you wish to review your existing investments or explore the possibility of building a new investment portfolio, then please do not hesitate to contact Phil Brook or call us on 01772 821021.
Whether or not a specific investment or indeed investment in general is suitable for you, will depend on your personal circumstances and objectives.
The content of this article should not be construed as advice or a personalised recommendation. No action should be taken without seeking further formal advice.
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