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First off, a quick overview of just what it means when you hear active and passive investing. In short, active investing is generally a strategy focused on trying to beat the performance of the market. Passive investing, meanwhile, seeks to track or mirror a market index rather than beat it.
Many investors want to know if it's better to purchase an actively managed mutual fund or exchange-traded fund (ETF), or take the passive route and buy an index fund. Will the extra fees you pay for the expertise of a portfolio manager lead to higher returns, or should you just try to match the market?
This question has no definitive answer, but thinking about a few key considerations may help you reach your own conclusions.
For the long-term equity investor, the debate between active and passive strategies rests on three main considerations:
- Market efficiency
- Portfolio construction
- Historical performance
Find out more about each in in The Active versus Passive Debate.
There is no definitive answer on which approach is best. As a self-directed investor, it's up to you to choose the investment philosophy that fits your beliefs and your situation. Indeed, you may wish to mix actively and passively managed investments in your portfolio. Checking Fund Facts or the management company's website for clues about how an investment product is managed can help you determine if it's active or passive. Often, an ultra-low fee would be an indication of passive management, while higher fees are generally associated with active management.
Whether you're an active or passive investor, a variety of products can help you to achieve your investing goals. For tips on making investment choices, check out the Researching Investments Guide.
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