A search on Google for passive investing vs active investing yields 1,330,000 results with plenty of support on both sides of the fence. In brief passive investing is a method where you buy an investment product that simply tracks an index. They are commonly called index trackers and with this method you expect to do no better than the index it is tracking after expenses.
In contrast active investing is a method where you pay a financial professional higher expenses than those of a passive tracker and in exchange he or she is supposed to beat an index s/he is measured against.
Beating the index is the critical point as research I’ve quoted before shows that somebody entrusting their money to a UK financial advisor or investment manager will be paying an average 2.56% annually for financial planning services and financial product expenses.
Let’s demonstrate the effect these expenses can wreak with a simple example knowing that UK equities have ‘only’ returned a real 5.0% over the last 116 years. Passive Punter self invests £10,000 into a UK Equity Passive Fund which sees expenses of 0.25% and then promptly forgets about it for 20 years. Assuming that fund returns a real annualised 5.0% before expenses over that period our Passive Punter ends up with a real £25,298. So far so good.
In contrast active investing is a method where you pay a financial professional higher expenses than those of a passive tracker and in exchange he or she is supposed to beat an index s/he is measured against.
Beating the index is the critical point as research I’ve quoted before shows that somebody entrusting their money to a UK financial advisor or investment manager will be paying an average 2.56% annually for financial planning services and financial product expenses.
Let’s demonstrate the effect these expenses can wreak with a simple example knowing that UK equities have ‘only’ returned a real 5.0% over the last 116 years. Passive Punter self invests £10,000 into a UK Equity Passive Fund which sees expenses of 0.25% and then promptly forgets about it for 20 years. Assuming that fund returns a real annualised 5.0% before expenses over that period our Passive Punter ends up with a real £25,298. So far so good.