Passive vs Active Investing

Ask the Expert

I’ve been speaking with my financial adviser about my recent inheritance.  I’m a bit nervous about investing it and he has suggested that I take a “passive” approach.  Will that mean that I won’t get very good returns from it?

Carl responds

Passive investing is a strategy where you select an investment portfolio based on an index such as the FTSE100 and then leave it for the long term, irrespective of any short-term changes in markets.  The passive approach recognises that values will rise and fall but, if you take a long view, the overall trend will be one of growth.

The aim with a passive portfolio is to track and match the index by holding stock from the companies that make up the index.  It’s a slow and steady approach which deliberately shies away from market volatility.  Fees and charges may be relatively low as there are fewer transactions happening in the background, but you must manage your expectations in terms of the portfolio’s growth.

The alternative to passive investing is active investing.  With an active portfolio, you engage a portfolio manager to buy and sell the assets in the portfolio as markets change with a view to beating a benchmark in terms of performance.  An active strategy may produce higher returns but incurs higher fees and charges because of the dealing activity involved.

There’s wide debate about which approach is best.  The truth is that both have their place and your adviser’s recommendation should be based on your specific needs and circumstances.

Neither passive nor active investing will cushion you from turbulence in the market.  Your adviser will hopefully have explored how you feel about risk, what risks you can afford to take and what risks you need to take to meet your objectives, and will have given you a risk rating that will help guide you to a comfortable level of risk in your portfolio.

Any opinions expressed in this article do not constitute advice.  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.