Conversations around index investing and active investing, and the benefits and constraints of each are nothing new. If anything, such conversations have seen a little increase of late, particularly amongst those who have read the Barefoot Investor – more on our thoughts re: this book, over here.
As we look into the pros and cons, it is also useful to define the two.
Per the Investopedia definition “Index investing is a passive investment technique. It attempts to generate returns similar to a broad market index. Investors use a ‘buy-and-hold’ strategy to replicate a specific index; often an equity or fixed-income index.”
Index investments offer greater diversification, as well as lower expenses and management fees, than actively managed strategies. ‘Passive’ investing is often an easier, more simple way, to gain access to a market.
On the downside, as an ‘index investor’ you have the capacity to choose a market. However, you won’t have the chance to outperform it. You will also have to accept the index, no matter the underlying holding – your personal ethics or preference may have to make way for larger companies or sectors. Active investing refers to an investment strategy involving buying and selling as an on-going, changing activity. Active investors purchase investments and monitor their activity continuously, looking to take advantage of profitable conditions.
With an active investment, you have the alluring opportunity to outperform the market. You can also invest more freely, with more choice available it can be easier to meet your ethical or socially responsible considerations when selecting where, and with who you want to invest.
Conversely, there is skill and research required when selecting an actively-managed fund that sees success. There are therefore generally higher management fees required to pay for the expertise and resources required for active investment management.
The choice is not always simple, nor straightforward. Your desired outcome and the length of your investment period are important considerations. And as always, we recommend seeking advice from a trusted and experienced Financial Advisor if you are looking to implement any investment strategy.
(Source: Investopedia https://www.investopedia.com/terms/i/index-investing.asp)