Category: Investing

Passive v Active Investing

Investment Style: Passive or Active

Will you follow an active or passive investment style?

The two styles are very different:

 

Active Passive
Belief It is possible to beat the market. It is not possible to consistently beat the market.
Approach Use research and skills to pick the best securities to invest in. Invest in the market.
Fees Charge a higher fee for research and skills. Charge lower fees.

What the data says

The data suggests that the majority of fund managers do not beat the market:

Category Percentage of funds that beat the market over 5 years
Australian Shares 31%
Australian Shares- Mid & Small Cap 29%
International Shares 10%
Australian Bonds 18%

Source: SPIVA Australia Scorecard Mid-Year 2018

The data above is over a 5 year time period.  Over the 10 year and 15 year periods the managers of small-cap stocks (i.e. smaller companies listed on the stock exchange) have been shown to outperform the market.

What does this mean for you?

If you are going to be driven by data, then you would use a passive management style to invest, potentially making an exception for small-cap stocks.

Passive

If you follow a passive investment strategy then your main investment tool will be exchange-traded funds (“ETF”).

An ETF gives you access to an entire market (e.g. the top 200 shares in the Australian market, known as the ASX200) through one single purchase on the stock exchange.

Fees for an ETF are lower than for an actively managed fund, they are more likely to be between 0.10% – 0.50%.

Active

You could be the exception to the rule and beat the market.  You have two options to do this:

  • DIY: Do the research and make the investments yourself.

Make sure you have the time and technical skills required for the due diligence on each investment, and that you have some kind of advantage (e.g. in depth knowledge of an industry) over professional fund managers.

  • Pay an active manager – you could outsource the investment decision by paying a fund manager to manage your money.

The cost is typically 1 – 2% of the amount that you invest.

The information on this website is for general information purposes only. It is not intended as  financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any financial product. Balance Impact does not recommend or endorse products and does not receive remuneration based upon investment or other decisions by our email recipients, publications, newsletter or website users.

 

Top Investing Mistakes

What are the key mistakes that investors make? Here we outline the top four mistakes and give tips to avoid them. Whether it be panic selling or frequent trading, we’ve got it covered.

Top Investing Mistakes

Investors can sometimes be their own worst enemy, so what are some of the mistakes that investors make?  Here we outline our top four.

1.  Panic selling

When the market drops severely, it is tempting to sell.  Before you do, ask yourself if some part of your investment thesis has changed (e.g. you invested in a company that is now being sued), if so then you should consider selling.  If nothing has changed, and your stock is simply down because of market noise, then you may be better off holding on to your stocks.

Investing is a long-term game, if you are investing for the long-term you can ignore short-term market ups and downs.

Loss Aversion

Just like selling in a panic is bad, holding on to a loser for too long is also bad.  In both cases you are allowing emotions to dictate your investment decisions.

Prior to making an investment, have a downward price limit in mind, once it hits this sell, unless there are some very good reasons for holding on to a stock (e.g. an impending takeover / buy out).

In the share market, like in life, you win some you lose some.  Cut your losses and move on.

Overly Frequent Trading

The fundamental thesis of points 1 and 2 are to have an investment strategy and stick with it.  Following a strategy will ensure that you make rational investment decisions and avoid overly frequent trading.

Trading too often is expensive and will impact your returns.  Studies have shown the impact of excessive trading on a portfolio:

Professional investors have a strategy, and trade only when new information comes to light that changes the strategy.  Novice investors trade in and out frequently, with no rationale, and 99% lose money.

Concentrated Portfolio

One common mistake that novice investors make is to hold only a handful of stocks.  This is a very risky strategy and one that is unlikely to perform well in the long-run.

In future posts we’ll go into more detail about constructing an investment portfolio the right way.

The information on this website is for general information purposes only. It is not intended as  financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any financial product. Balance Impact does not recommend or endorse products and does not receive remuneration based upon investment or other decisions by our email recipients, publications, newsletter or website users.

Investment Ready

Are you investment ready? Learn about the steps you should take before investing, and how to plan for successful investing.

Our first tip for investing is to make sure that you have your finances in order so that you are investment ready.

You are ready for an investment portfolio if you are:

  1. Saving more than you are spending each month
  2. Have 3-6 months salary saved in case of emergency
  3. Paying off your credit card in full each month
  4. Are comfortably meeting all your debt repayments (e.g. mortgage / car loans) and could continue to do so if rates increased
  5. Have adequate life and income protection insurance in place
  6. Your retirement savings are on track

Make sure you have checked off each of the six points above before you start investing.

Before you get started

Like most things, investing works better when you have a plan.  Before you start investing it is important to consider:

Investment Goal Whether it be to save a deposit for your first home, or to pay for your child’s education, it is important to identify why you are investing.
Time Frame How long will your money be invested for? This is a crucial part of any investment strategy, as it will help determine which investment products are most suitable for you.
Return How long will your money be invested for? This is a crucial part of any investment strategy, as it will help determine which investment products are most suitable for you.
Risk How much of your money could you afford to lose? Nobody likes losing money, but if you are investing there will come a time when you will lose some money.  Determining how much you could afford to lose will help you determine which assets to invest in, as some are much riskier than others.
Taxation How much of your money could you afford to lose? Nobody likes losing money, but if you are investing there will come a time when you will lose some money.  Determining how much you could afford to lose will help you determine which assets to invest in, as some are much riskier than others.

Conclusion

Starting an investment portfolio is a process.  The more time you spend in the planning stage, the more likely you are to meet your financial goals.  Once you have confirmed:

  • That you are financially ready to invest;
  • The goal and timeline of your investment; and
  • Your risk and return targets

Then you ready to start building your portfolio.  The construction of a portfolio is yet another process, which we’ll discuss in more detail in future posts.

The information on this website is for general information purposes only. It is not intended as  financial or investment advice and should not be construed or relied on as such. Before making any commitment of a financial nature you should seek advice from a qualified financial or investment adviser. No material contained within this website should be construed or relied upon as providing recommendations in relation to any financial product. Balance Impact does not recommend or endorse products and does not receive remuneration based upon investment or other decisions by our email recipients, publications, newsletter or website users.

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