What is the meaning of life?

What happened before the big bang?

Will the host of Survivor (now on season 48) ever age?

These are some of life’s biggest questions. When it comes to investing, the big question is: should I invest actively or passively?

This is a tough one! But the answer may surprise you.

What is passive investing?

Passive investing, more specifically passive funds, track a market index like the S&P 500. Instead of trying to pick certain stocks, these funds own all (or most) of the companies in an index. It’s like buying a “basket” of many different companies at once.

Pros of Passive Funds

1. Lower fees: You pay less to invest, which means you get to keep more of your money.

2. Easy to understand: You don’t have to check which stocks the fund manager picked. You get the whole market!

3. Steady growth: Over many years, the stock market often goes up, and passive funds follow that trend.

Cons of Passive Funds

1. No big wins: You can’t beat the market if your fund is only following it.

2. Limited choices: You own everything in the index, even the stocks you might not like.

What is active investing?

Actively managed funds have a professional manager (or team) who studies the market and picks the stocks they think will do better than the rest. A sniper approach.

Pros of Actively Managed Funds

1. Chance to outperform: A good manager may beat the market by choosing the right stocks at the right time.

2. Special focus: Some managers focus on certain groups of companies (for example, tech or clean energy). This might give them an edge in that area.

3. Flexible strategy: The manager can change which stocks the fund owns if the market changes.

Cons of Actively Managed Funds

1. Higher fees: Paying a manager can be expensive, which reduces your profit.

2. Inconsistent results: Even skilled managers do not always beat the market each year.

3. Less predictable: The fund’s performance depends on the manager’s decisions.

When should I invest actively vs. passively?

The answer is all to do with other investors.

If there are tons of investors actively buying in a specific market, then that market is called “efficient”. Meaning the prices of investments in that market should be a pretty accurate reflection of the actual value of those investments.

In markets that are really efficient with lots of investors, like the U.S. stock market (S&P 500), it is very difficult to perform better than the market consistently. This is because the chance is super low that that even super sophisticated investors having some sort of edge on knowing which companies will outperform.

In efficient markets, it’s best to invest passively. That way you can cheaply invest in that whole market, without worrying if your fund will underperform the market, because your fund is the market!

However, there are some markets that are super INEFFICIENT, because far fewer people are investing in them. Have you ever heard of your friends investing in Icelandic stocks? Latvian small caps? Finnish tech companies? Didn’t think so!

Check out this link to see stock markets from around the world. There’s way more than you’d think!

Inefficient markets are great for active investing, because it’s easier to beat the market with less investors going up against you.

I’m enlightened. Now what?

Combining active AND passive investments in your portfolio is truly a pro move. Take a look at your current investments - are you all active or all passive? Are you only invested in super efficient markets? Seriously, how does the host of Survivor age?

Answering two of these questions will help boost your investments even more.