One of the first choices you need to make as an investor is between active and passive investing. Let’s look at the differences and why passive investing is often the best choice, both for beginning and experienced investors.
One of the first choices you need to make as an investor is between active and passive investing. Let’s look at the differences and why passive investing is often the best choice, both for beginning and experienced investors.
Important to note: investing involves risks. You may lose part of your investment. Past performance does not guarantee future results. The information in our blogs is general and not personal investment advice.
Active investing is a strategy where an investor buys and sells stocks with the goal of beating the market. The investor tries to select the best stocks and/or enter or exit the market at the right time. This requires extensive research, analysis, and a good understanding of economic trends and company performance.
As an investor, you can also participate in an actively managed investment fund. In that case, it’s the fund manager who actively invests. Actively managed funds often have higher costs due to the intensive work of the fund manager.
Passive investing is a strategy where you try to follow the market. For example, a passive investor buys an The ETF (Exchange-Traded Fund) that tracks the American SP 500 index. This ETF then contains all 500 companies from that index, in the same proportion as they are in the index. Because there’s no need for an expensive fund manager to constantly conduct research and execute transactions, the costs of passive index funds are significantly lower. Research shows that passive investing usually yields better returns than active investing. This is mainly due to the higher costs associated with active investing.
For most investors, whether just starting out or with extensive experience, passive investing is the logical choice. The advantages over active investing are substantial.
The costs of investing, such as management fees and transaction costs, have a significant impact on your ultimate return. Passive funds, like ETFs, have extremely low costs compared to active funds. As a result, more returns are left for you.
Most of us don’t feel particularly inclined to analyze company balance sheets on weekends or anxiously follow stock price movements every hour of the day. Passive investing is “hands-off”. You make a choice once and then it’s best to leave it alone.
Of course, you can also invest in an actively managed fund. In that case, the time and effort it costs you is limited.
With passive investing, diversification is a basic principle. That’s why investments are almost always made through a fund or ETF that follows the index. This way, you automatically spread your investments across hundreds (or even thousands) of companies.
If one company performs poorly? You’ll hardly notice, because it’s only a very small part of the index, and therefore only a very small part of your investment. Meanwhile, the other companies easily make up for it. And the winners, the companies that are growing rapidly, are also included. This way, you automatically benefit from their success without running the risk of missing those gems.
Research shows that the vast majority of active fund managers – who are supposed to be the professionals! – fail to consistently beat the market over the long term. In fact, due to high costs, they often perform worse than the market itself. Passive investing offers you the certainty of achieving the average market return. Historically, the average return on investing in global stock markets is around 8% per year.
For most investors, passive investing is the sensible choice: low costs, little hassle, less risk, and proven results. This way, you build wealth step by step, without having to look at the stock market every hour.
With UpToMore, you make it even easier for yourself. You automatically invest in a passive, globally diversified fund with sustainable companies. Set it up once, and then your money grows along with the stock market.
Important to note: investing involves risks. You may lose part of your investment. Past performance does not guarantee future results. The information in our blogs is general and not personal investment advice.