What Is Active and Passive Investing?

Investing for your future is one way you can help to secure your retirement and there are a couple of investing techniques which can be used.

Some investors use the ‘active’ approach whereby the manager looks to out-perform or beat the market, while ‘passive’ investing uses tracker funds that aim to replicate the market or benchmark it – in this article, we look at the pros and cons of both investing techniques.

Active Investing

Active investing is very much a hands-on approach and requires a solid amount of research, incorporating deep market analysis. Holdings that are perceived undervalued or those with good future growth prospects are sought out.

Good buying and selling techniques are needed to capitalise on fluctuations in the market – of which there are many and an active investment manager needs to be on the ball.

Pros & Cons of Active Investing

One of the main benefits of active investing is flexibility. The fund manager can move money to potentially profitable opportunities while avoiding those which offer no return.

The goal is for the active manager to produce a higher return than the market, however, the one disadvantage of this is that they may not get this right every time.

There are also additional costs to this style of active management as well as the underlying fund and trading costs.

With the higher charges comes a drain on performance and you will need to consider where the additional returns will exceed the above charges, meaning a higher return for the investor.

Passive Investing

On the other side of the coin is passive investing which attempts to replicate the return of an index or benchmark (for example the FTSE100).

People who choose a passive investing strategy can manage their own portfolio or work with a low-cost investment advisor who uses buy and hold strategies.

Pros & Cons of Passive Investing

Passive investing is a lower-cost strategy and requires a buy-and-hold mentality. This means you should avoid the temptation to react or anticipate the stock market’s next move.

It’s for the above reason that makes passive investing less of a risk than active investing as you don’t have to worry about buying or selling and can rely on steady market growth.

Which Strategy Is Right For Me?

Deciding on whether you are an active or passive investor will be a discussion to have with your wealth management adviser.

They will analyse several factors including current market conditions, your investment objectives and goals, how much you have to invest, what your time frame is for the investment and most importantly your attitude to investment risk and your capacity for loss.

There is no right or wrong answer here, and only hindsight will tell us over any specified investment period which was the best approach.

Contact The Experts

If you would like to speak to one of our wealth management advisers, then get in touch with us here. Alternatively, you can call us 020 3778 0973 or email info@thestanlee.com  We can help you get the best out of your retirement planning. We look forward to speaking with you.