You’ve probably heard about active and passive investing, with fund managers maintaining staunch positions on which one is the right investment strategy to yield the best returns.
Which approach is the right one to take? At 1nvest, we believe in laying out the facts in order for investors to make their own decision. Transparency is key.
Let’s delve into what is passive investing vs active investing and how to determine what’s the right investment strategy for you:
What is passive investing?
Passive investing is a strategy that tracks an index or portfolio by mirroring the performance of a specific index through the purchase of an index fund. The benefit of tracking the index, is that the investor is provided with a diversified investment.
Usually, most passive investment funds attract lower management costs when compared to actively managed funds.
What’s important to note with investing is that, although as an investor you may want less of a hands-on approach, passive investment funds can also still be actively managed by their fund managers.
What is active investing?
Active investing involves choosing the most attractive investments based on each investment’s worth, with the goal of beating the market, or outperforming the index.
That means, the goals of an active investor would be to outperform the JSE Top 40 Index and receive greater returns. While passive investing involves holding on to your investments over a longer term, active investors look to buy and sell as the market moves.
However, where you are actively investing on your own, or using the services of an active fund manager or broker – this strategy involves a higher time-commitment to buying and selling investments.
To be an active investor you would also need to have the knowledge and confidence to make the right investment decisions, which also involves a higher risk investment strategy than with passive investing.
Active versus passive investing: What’s the difference?
The debate over active versus passive investing is ongoing with some commentators strongly advising a passive investment approach, while others advocating an active approach.
In some investing climates – such as when the market is experiencing a high degree of volatility – active strategies have proven successful, while in others a passive investment strategy has outperformed active investments.
At 1nvest, we don’t believe you should adopt an either/or approach, but instead we maintain that investors will be best-served in combining both passive and active investment strategies, so that when market conditions change you benefit from both investment positions.
When deciding which course is right for you, it’s best to consider your risk appetite, timelines, goals and how much of your money you are willing to invest.
For example, if reduced fees and trading costs is a key consideration for you then a predominantly passive portfolio would be better for you.
If return and liquidity are more important to you than fees, then a mixed approach or predominantly active portfolio could be the right investment approach.
Why consider a passive investing strategy
There has been a growing interest in in passive investing globally and in South Africa for a number of reasons.
Inflation-beating returns and portfolio diversification
Passive investing can still provide inflation-beating returns and portfolio diversification.
For example, if you invest part of your portfolio in the 1nvest Gold ETF, the 1nvest S&P500 Index Feeder ETF and the 1nvest ALSI 40 ETF, your portfolio can beat the broader market.
The ETF investments keep investment costs low, and the diversified exposure to commodities, the local and global market, which will allow you to beat the market.
Passive investing is actively managed
Even with passive management, your financial advisor will still take an active approach by actively researching and analysing the optimal investment tool that suit the investors risk and return appetite.
A pure passive investment approach also does not exist, but rather blend the best of active with that of passive investing. Active solutions such as balanced funds use index building blocks but with the objective of providing your client with inflation beating returns in the long term.
Choosing the best product to reach a financial goal is an active act and requires just as much expertise, knowledge, and active advice.
Types of investment funds to choose
There are different types of investment funds to consider:
An index fund consists of a portfolio of shares bought in the same proportion as a specific index such as the JSE Top 40, replicating its performance exactly. The fund can be structured as either an Exchange Traded Fund (ETFs) or as a Mutual Fund (also known as an Index Tracking Unit Trust).
Exchange Traded Funds (ETFs):
- ETFs follow an index, like the MSCI World Indexes, S&P 500 or the JSE Top 40 Index, and consist of a basket of assets that are bought and sold on an exchange, representing a partial ownership of a portfolio.
Index Tracking Unit Trusts:
- An Index Tracking Unit Trust tracks an index, like an ETF, but the key difference is that the dealing is only done once a day, so there will be a time lag between the trading order and it being settled in the fund.
- Also, there is less transparency for the investor around the underlying range of asset classes that make up the fund as this is determined by the fund manager.
How to start investing in investment funds
Ready to start investing?
Your next step will be to find the right financial advisor or online share trading platform to get you going on your investment journey.
1nvest has partnered with some of the best platform providers to deliver affordable access to Unit Trusts and ETFs.
With low administration costs and access to a Tax Free Investment Account, we will get you set up and investing – quickly and simply.
Still want to learn more before you take the plunge?
Our Comprehensive Guide on Investing for Beginners explores various investment options to help you decide which is best-suited to you.