If you want to invest, you have to make a choice between active and passive investing. When do you choose active investing and when passive investing? The choice of strategy depends on a number of things. There are major differences between active and passive investing. And what about the chance of a higher return?
Investing in shares vs investing in bonds
If you want to invest, you do so because the return is higher than with a low-risk savings account. After all, the goal of investing is to achieve a high return. You can choose shares or bonds. The first is riskier where returns can fluctuate widely. Investing in bonds is less risky and has a more predictable return. Investing in shares can yield a higher return than investing in bonds. The greater the risk in an equity investment category, the higher the return or loss can be.
If you choose the active investing strategy, you try to achieve a better return than the market you follow. Most investors engage in active investing. To achieve a better return, use the following tactics:
- you choose the shares yourself
- you choose the best fund manager yourself
- you choose your own investment style
- you determine the moments of purchase and sale yourself
Choose the shares yourself
As an active investor, you try to select stocks that will outperform the market in the future. This increases the chance of a better return.
Choose the best fund manager yourself
Based on previously achieved positive results from a particular fund manager, you can make a selection between investment funds with the best track record. Naturally, future returns remain difficult to predict.
Choosing the right investment style
Based on previous successful investment styles, you can use a similar style when putting together the investment package.
The moment of purchase and sale
If you actively invest, you must time the moments of purchase and sale well. If you expect prices to fall, then that is the time to sell. Conversely, an expected price increase is the time to buy.
Unlike active investing, with passive investing you do not try to achieve a higher return than the market you follow. The goal of passive investing is to achieve a return comparable to the market. This is also called index investing. With index investing, investment funds attempt to mimic the performance of an index. These funds are called index trackers or index funds. The returns and risks of such a fund are comparable to the index that is tracked. Indices, both passive and intelligent, that can be followed include:
- a stock index
- a bond index
- a real estate index
Passive investing and returns
When do you get a better return through passive investing? As the period of passive investing in an investment fund lengthens, the chance of a higher return than the market increases significantly. And then actively invest? It is very difficult to increase the chance of a higher return than the market you follow. Selecting an investment fund with a better return is very difficult for a private investor. The most commonly followed strategy by investors is to buy an investment fund that has performed well in a recent period. New performance often lags behind after purchase and the return is quite disappointing. Passive investing seems less exciting than active investing, but ultimately provides a greater chance of a higher return.
The differences between passive and active investing
To clarify, the most important differences between active and passive investing are listed below.
- Active: Beating the relevant index or asset class.
- Passive: Achieving a comparable return as the relevant index or asset class.
Expected average return
- Active: about 4% per year.
- Passive: about 12% per year.
Number of purchases and sales
- Active: Lots of buying and selling.
- Passive: Few purchases and sales.
- Active: Most banks offer investment funds.
- Passive: Asset managers such as Vanguard and Barclays (iShares).
Costs and returns
- Active: High costs and a high chance of low returns.
- Passive: Low costs and a high chance of a market-based return.