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.
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