My financial adviser has been talking to me about changing my investment strategy from using passive investments into active investments. He did explain the difference to me but on reflection I really don’t understand. Can you explain the difference please? I am quite cautious with my investments so am concerned that a more active investment strategy might leave me more at risk.
Carl Lamb responds
This is a complicated area so do go back to your adviser and talk it through again before giving the go-ahead.
With active investments, the content of the fund is generally run by a manager who will buy and sell the underlying investments in the fund with the aim to beat the performance of the market when measured against specific benchmarks such as the FTSE 100. The investment managers will carry out research and use their expertise to make decisions in an attempt to deliver better returns – or at least limit potential losses if markets fall. The cost of this service is higher than with a passive approach because of the intervention of the fund manager.
The content of a passive investment fund, on the other hand, simply aims to track a benchmark rather than outperform it. The investment manager will set the strategy but will be less involved in making changes to the content of the fund.
The important point to make is that both active and passive investments can be aligned to your risk profile so there is no reason why a change of strategy will expose you to more risk.
I can’t tell you which approach would be more suitable for you without finding out all about you and all aspects of your circumstances but do get a second opinion from an alternative adviser if you are still unsure about making a change. Both strategies can be effective, depending on a number of factors. In fact, we will often adopt a strategy that uses both active and passive elements, where we feel it is suitable.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.