Active or Passive? Does it really
need to be either or could it be Both?
With all the economic turmoil, issues and
virus concerns seemingly everywhere you turn, in markets all over the world,
many people are trusting managers of active investment products. Why pay higher
fees for players in a rigged, or at the very least an incredibly tumultuous,
game? Passive investment managers charge lower fees whose decisions are
dictated by a pre-determined structure and strategy.
“This is a very black and white point of
view that will do your investments more harm than good,” says Richard Cayne of
Meyer International. Richard advises his clients to carefully consider both
strategies – they each have their pros and cons, and they both can be part of a
profitable financial plan.
What is active investing?
An active investment manager is actively
engaged in deciding what and when to buy and sell. This sounds simple, but it
is actually a very complex, involved commitment. The manager must research
extensively and be able to quickly absorb and analyse market data to make
decisions that will beat the market. Considering all the variables that affect
a financial instrument, this is a profound undertaking. This is why active
investment managers charge higher fees. But how well do they perform? In recent
years, not so well. According to Morningstar’s Active/Passive barometer, active
funds have been underperforming passive funds, especially over longer time
periods.
So why bother with them? Under certain
conditions, active investing can pay off very well. Before you hand your money
decisions, do some research. Is the manager an expert in the fund sector or
emphasis? If the strategy is too general, this usually does not bode well for
active management. Also, success with this strategy often relies on being first
in to profit most. In more developed markets, this is difficult since there is
literally a wealth of information available. Emerging markets and sectors will
often require specialised access and insights that can help active investing
thrive. Also, active investing can respond immediately to sudden changes in the
financial world, like the recent Brexit vote.
What about passive investing?
While active investing relies on an
individual analysis of a specific dataset, passive investing looks to the
overall performance of a certain group of equities or debts. Passive investing
focusses on a certain index like the S&P500 or the DJIA or a set exemplar
from a specific sector or exchange. Then investments are chosen that match that
given group. The idea is that while it may be hard to predict a single
investment that will beat the market, the market, whatever that may be, will
perform consistently and, in times of loss, will eventually correct and profit.
So, while passive investing may not reap
huge returns, it offers the possibility of dependable, constant returns that
investors may feel they have more control over (since they will know at any
time what investments are being made).
Now, what to choose?
So, there are many variables that can
affect both strategies, for good and for bad. It would then not be wise to
write off one for the other. When making any financial decision, all possible
scenarios and options should be weighed, from how much risk you want to take to
whether you believe certain sectors or markets are worth special attention.
“You really need to be realistic about what
type of returns you’re expecting from your portfolio over a set time period,”
Richard Cayne counsels. “Both active and passive investment strategies have
their place, you just need to be thoughtful about what their places are for
you. A good financial advisor should be able to work with you and help you plan
appropriate allocation.”
“Also, a lot of people forget that their investment
decisions are not set in stone,” Richard adds. “Markets fluctuate, so should
you. There’s no need to make adjustments at every report of a downturn or
potential economic hiccup, but you definitely should revisit your portfolio
regularly with your advisor to make sure it reflects market trends and your
risk appetite.”
For more information on this or any other
financial topics, please contact Richard at Meyer International in Bangkok
Thailand.
