Passive Investing vs Active Fund Managers for Beginners
- Tom Eason
- Jan 15
- 3 min read
Updated: Feb 14
Not sure about the difference between passive investing and active fund management? Here's a quick guide for beginners!
What Is Passive Investing?
Definition: Passive investing means putting your money in funds that replicate a specific market index, such as the S&P 500 or FTSE 100. These funds aim to mirror the market's performance rather than beat it.
Simplicity: It’s like putting your investments on autopilot. For example, if you invest in a global tracker fund, it automatically adjusts to include all the stocks in the index it follows, without you needing to take action.
Lower Costs: Passive funds are often cheaper because there’s no manager actively picking investments. For example, an S&P 500 tracker fund might charge a fee as low as 0.06%, compared to higher fees for managed funds.
Summary: Passive investing is a hands-off approach. You don’t have to choose stocks yourself—your money follows the market, and it’s usually cheaper to manage.
What Are Active Fund Managers?
Definition: Active fund management involves a professional manager (or a team) actively choosing and trading investments to try to outperform the market. They aim to beat the index instead of just following it.
More Involvement: Active managers research market trends, companies, and sectors. For example, an active manager might decide to buy shares in a promising new tech company or reduce holdings in underperforming sectors.
Higher Costs: These funds come with higher fees to cover the manager's expertise. For instance, an actively managed tech fund might charge 1.5% annually compared to the low fees of passive funds.
Summary: Active investing puts your money in the hands of experts who try to beat the market by picking specific stocks. It can be more expensive and requires trust in the fund manager’s ability.
Fast Facts to Know:
Cost Savings: UK investors have saved £80 billion in fees by choosing passive funds over the past 12 years.
Performance: Nearly 65% of actively managed funds underperform passive funds, meaning you’re often paying more for less.
Ease of Use: Passive investing avoids the stress of market timing and frequent trading.
Summary: Passive investing has been cost-effective and easy to manage, but not all active funds underperform—some may be worth exploring.
Things to Watch Out For:
Old Pension Funds: Many older workplace pensions have underperforming active funds. For example, if your pension was set up before 2012, it might still include high-cost active funds that haven’t been reviewed in years. Contact your provider to check what you’re invested in.
Fee Differences: Even among passive funds, fees vary. For example, £10,000 invested in a higher-fee FTSE 100 tracker (1.06%) versus a lower-fee tracker (0.06%) over 10 years could leave you with a £1,540 difference.
Concentration Risk: Passive funds tracking global indices often have heavy exposure to a few tech giants. For example, the S&P 500 is made up of 30% “Magnificent Seven” stocks like Apple and Tesla, which can increase risk if these companies struggle.
Summary: Whether active or passive, always check fees, fund performance, and risk factors. Older pensions may need updating, and passive funds can sometimes be too concentrated in a few big companies.
Quick Tip: Some areas, like emerging markets or smaller companies, may give active managers an edge. For example, an active manager targeting Asia-Pacific markets might outperform passive funds by finding hidden opportunities. For most investors, combining passive funds with specialized active funds could balance simplicity and potential growth.
Which strategy do you prefer? Passive or active? Let us know in the comments, or if you have questions and want to explore your options, reach out to arrange a free 30-minute consultation to start your investment journey with me!
Important: Capital at risk. The value of your investments and any income from them can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future results. Investments should be considered over the long term. This information does not constitute financial advice. Please seek advice from a qualified financial adviser before making investment decisions.
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