Howard Goodship, CFP Ringwood, - Passive vs Active Investing

Thursday 13 August, 2020

With interest rates at all time lows, and by all commentary likely to remain there for several years, savers require solutions other than cash to enable their money to retain its real value (after inflation).  Investing becomes a necessity rather than a luxury.

I’ve written about how to select the right level of risk through multi-asset funds and how to then control that risk on an ongoing basis through ongoing investment management. Now I will briefly explain two different methods of investment management; passive and active.

Active Investment Management

The aim is to beat the return from a particular index or benchmark (eg FTSE 100). Fund managers seek to do this by using their knowledge and skill to analyse the market. They then buy shares, bonds or property which they believe are presently undervalued and so have the potential to increase in price over time. The managers utilise in-depth research to find hidden value.

Passive Investment Management

A passive fund replicates a specific index via computer driven programmes to offer a diversified spread of investments in a specific market. There is no research to endeavour to beat the market, but because the fund is replicating an index, there should be no underperformance of the market.

Should you invest in active or passive investments?

Our independent financial advisers are not biased towards active or passive investment, as we offer our clients both options.  For more information about active and passive investing read our brochure - Passive v active investing. At Lonsdale Wealth Management our qualified independent financial advisers always provide clients with personalised financial advice.  

Comparing the two approaches, charges will be higher with an active manager, due to the necessary research and analysis but a good fund manager/fund can significantly outperform the index, even after the higher charges. The risk is that they may not, and you’ve still paid more for the service.

Passive investing is low cost, so each and every year you pay less in charges but still get the benefit of a diversified investment portfolio. As an investor, the saving in charges remain in your pocket and over time these can be substantial. However, the risk is that if the index falls or remains level, your fund will follow and is unable to outperform.

Howard Goodship, Chartered Financial Planner, Ringwood, Hampshire said:

'In conclusion, there is no right or wrong approach. In fact, I often advocate a combination of the two for my clients with a percentage of their investments benefiting from lower charges in the passive solutions and a percentage of their investments benefiting from high quality, active management. This adds further diversification and in combination with investing into multi-asset portfolios which are rebalanced on an ongoing basis, reduces the overall risk to my client’s portfolios.

To finish where I started, with bank and building society rates at all time lows, inflation will erode the value of savings over time. For many people, investing is now a necessity for their long- term money (5 years plus) to help preserve and even enhance their lifestyle in retirement.

We offer a free initial meeting (remote or in person) so if you’d like to learn more or discuss your personal circumstance, please don’t hesitate to contact us.  To understand more about investing we recommend you read our brochure - A Beginner's Guide to Investing.'

Howard Goodship has written several articles for his Understanding Investments series.  Read more below.

1 What are Investments and why should you own them?

2 Managing risk and tax to earn a higher return.

3 Fees, costs and value.

4 Tax efficient investment income.

5 What are my pre-retirement options

6 What are your choices at retirement

7 How much money do you need in retirement?

8 Tax efficient saving for grandchildren

9 The value of independent financial advice

10 Pension contributions for all ages

11 How to combat inflation the enemy of retirees

12 Actions to take in volatile bear markets

13 How to achieve tax efficient investment income

14 The value of ongoing investment management

Howard Goodship is an Independent Financial Adviser with Lonsdale Wealth Management, 5 Friday’s Court, Ringwood Tel: 01425 208490   www.lonsdaleservices.co.uk

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. The contents of this article are for information purposes only and do not constitute individual advice.

 

 

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