Asked on 27 Jul 2019
I am new to investing and have been hearing these terms like passive and active management
Does active management really generate better returns ?? And more importantly, can they do it consistently over time ???
I am interested in long term investing (30-40 years horizon), which route would be more suited to this objective ?
My emergency funds and insurance coverage has already been set up nicely so I believe i am ready for this long term commitment.
We don't have a crystal ball, so whether or not actively managed funds will outperform over the long run is not a question that is easily answered.
A mixture of both works for me. I currently actively invest in shares when they become undervalued, and I am vested in several SGX listed counters. For markets that are out of Asia where I have little familiarity, I hold unit trusts that have been outperforming the benchmark, nett of fees.
Ultimately it boils down to what you prefer and are comfortable with. To hedge my risks I also hold a annuity to ensure that there is an element of protection from market risk when I eventually retire.
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In short, passive investing is more optimal in the long run.
In the long run, the probability of your advisor constructing a portfolio that can generate consistent alpha is close to none, which is as good as the probability of an active fund manager consistently picking winning stocks.
Passive investing give you a head start in the game by having a much lower total expense ratio than active fund. You can get a broadly diversified US-focused ETF for less than 0.10% per annum (TER), excluding transaction cost. Google “VOO ETF” and/or “VTI ETF”.
Whereas most active funds on average, has a total expense ratio (TER) of about 1%.
Google “SPIVA report”
Statistically speaking, most active funds UNDERPERFORM their benchmarks in the long run. While underperforming, most traditional mutual funds ex of hedge funds, will still be able to collect their management fees. Which frankly, sound absolutely ridiculous to me. Not sure how they can get away with this.
Active management does have its merit especially in inefficient markets/sectors.
However, every fund manager worth their salt, are looking for alpha in these said markets. Mis-priced securities will become efficiently priced over time and inefficient market will become efficient over time.
Consistent alpha cannot be found in these said markets. Key word being consistent.
One thing that is consistent with active funds though, is their fees. To active managers’ credit, fees are being compressed for the past 5 years. Though, still not within the range passive funds.
Hope this helps.
As always, do your own due diligence.
Hi Anonymous, thank you for your question. This is Alvin Neo, an adviser from MoneyOwl and would like to share some insights. I understand your dilemma in choosing a suitable investment approach for yourself. Hope the following helps you.
First of all, it is important to have a strong financial health before embarking into investing, which you have already done so. This allows you the ability to ride through short term investment fluctuations in order to achieve long term return. A strong financial health includes disciplines such as having adequate emergency fund, protection and not taking excessive loans.
Next, what exactly is active management? Such approach usually focuses on ability to forecast and capture investment opportunities in the market to achieve above market returns. This typically means:
· Picking individual securities
· Picking the times to be in and out of market
· Picking times to move from one asset class to another
· Picking the next hot investment theme
· Picking an active fund manager based on his/her recent performance
However, studies have shown that it is not easy to beat the market. In one study by Michael J. Mauboussin, ex-chief investment strategist of Legg Mason Capital Management, between 1978 to March 2007, investing in the S&P 500 index gave an average annual return of 9.5%. If you successfully moved out your investment during the worst 50 days during this period, your returns would have jumped to 18.2% p.a. However, if you missed the best 50 days during this period, your returns would drop to a meagre 1% p.a.
Burton G. Malkiel, author of “A Random Walk Down Wall Street”, did another study on market return over the past 54 years. Out of the 54 years, market has risen in 36 years, stayed flat for 3 years and declined in only 15 years.
What these studies show is that if one tries to time the market and get the timings wrong, he/she can end up in a bad shape. Also, as markets are usually on the rise, the chances of being wrong is 3 to 1. This is a very stressful way to invest. Passive investing or rather staying invested to get market returns is a more reliable approach than timing the market.
At MoneyOwl, we are convinced that in the long term, through the ups and downs of the markets, the 3 things that are crucial to a good investment experience for our clients are:
Investing into a globally diversified portfolio
Do not try to beat the market. It just does not make sense when the evidence shows that the returns from the market in the long term can give you what you need.
Keep cost low. Cost is probably the only thing we can control in investing.
Additionally, clients can also access a MoneyOwl adviser to guide and coach them in their investment journey.
To find out more about how MoneyOwl helps to create a successful investing experience, you can read here: https://advice.moneyowl.com.sg/the-right-way-to-invest/
Active for me. As I know how to consistently deliver returns in excess of 40% with managed risk. If you are new, consider learning how to build a passive balanced portfolio comprising of ETFs. There's a book called Rich by Retirement available on amazon that was written for a Singapore context. Another book I'll recommend is called millionaire teacher by Andrew Hallam. Both books are excellent for newcomers to the world of investing.
Hope this helps and all the best
The first thing to consider would be whether you’re managing your own investments portfolio or you‘re letting others manage your funds. There are funds managers that does either passive or active investment management. However if you’re managing you’re our own investments, an important thing to note would be the amount of time you can set aside to actively manage your investments, if time doesn’t permits, an passively managed investment portfolio can also do equally well as compared to an actively managed portfolio.
Active funds managements from fund managers tends to come with high costs which would eat up your investments returns as actively managed investments would tend to shift funds more actively in pursue of better returns. the main advantage active funds manager possess would be the resources available for them to make presumably sounder investment decisions on your behalf.
My personal take given I have similar time horizon as you would be to be more hands on with my investments followed by a more passive investment strategy when life other commitments start catching up whereby time would have to be spent elsewhere.
Wishing you a wonderful investment journey ahead.
Start with passive 1st while learning about active
can use both strategies to see which one works for you since every individual circumstances are different
for stocks and very longterm horizon passive (via indexing ETFs) seems the best choice
for that read more here:
If you are asking this question, it’s better to go passive and read up more about investing first. When you are able to beat the market, then you will have your answer. :)
You are ready for this long term commitment today. Just like we cannot predict future performance of active/passive funds, we also cannot predict your future financial health. Many articles debate on choosing between active and passive, but this is not a custody battle. You can do both, since you are new to this, and have some padding in money and insurance (which you should review from time to time. Sorry, occupational habits).
Try them out, see how they perform, the fact that no one can answer probably means neither is vastly superior than the other, each have their own pros and cons which only individuals who experienced it can best determine themselves.