Investing can be a complex journey, particularly when choosing between active and passive strategies. While ‘passive’ might imply a more relaxed approach, it often requires more involvement than one might anticipate. For example, our automated investment service utilizes a mix of both strategies, favoring the passive approach. However, this does not mean it is inactive; numerous adjustments and strategies are implemented on any trading day.
Each year, we carefully reassess the asset allocations in our portfolios to ensure they reflect the evolving dynamics of the global market and align with long-term forecasts.
This ongoing adjustment highlights that passive investing is anything but stagnant.
Table of Contents:
The core differences between active and passive investing
To understand what separates passive investing from its more dynamic counterpart, it is essential to recognize their fundamental purposes and associated costs. Both strategies involve decision-making regarding fund allocation, whether by individual investors or professional entities.
Defining objectives and costs
The primary difference lies in the goals of each approach. Active investing seeks to outperform the market, a task notoriously difficult over extended periods. For instance, the S&P 500, which represents a substantial portion of the U.S. stock market, shows that less than 15% of actively managed funds have exceeded its performance over five years or more.
Nonetheless, this does not render active investing irrelevant. Certain markets lack the efficiency of the S&P 500, presenting opportunities for skilled investors. With adequate expertise and access to relevant information, there may be abundant opportunities in smaller or emerging markets, as well as in bond markets where pricing can be less predictable.
The importance of due diligence in active investing
When investing in an actively managed fund, you are essentially investing in the management team’s capabilities as much as in the securities themselves. Therefore, conducting thorough research into the team’s background and performance history is vital. Our firm employs a rigorous quantitative and qualitative assessment process to evaluate the teams behind these funds.
Niche markets and specialized funds
Another factor to consider is the availability of passive index funds in specific niche markets. For example, the Academy Veteran Bond ETF (VETZ) focuses on loans to both active and retired U.S. service members, making it a strong candidate for active management. This fund aligns with our commitment to social responsibility, seamlessly fitting into our Social Impact portfolio.
Additionally, many investors appreciate having a hands-on role in their investments. A survey conducted with our customers indicated that approximately 75% engage in some form of self-directed investing alongside their managed portfolios. This practice not only adds excitement but also offers valuable learning experiences.
Understanding portfolio composition: active versus passive
When analyzing portfolio components, the differences between active and passive strategies become apparent. Stock indices are constructed based on the market capitalization of companies, which fluctuates over time, leading to natural changes in the composition of indices and the funds that track them. This self-adjusting nature ensures that underperforming stocks gradually represent a smaller percentage of the index, while high-performing stocks gain prominence.
Moreover, hybrid approaches, such as smart beta, allow fund managers to modify preset indices based on specific quantitative factors. One such option we offer is the Goldman Sachs Smart Beta portfolio, which prioritizes investments in companies meeting certain performance criteria.
Each year, we carefully reassess the asset allocations in our portfolios to ensure they reflect the evolving dynamics of the global market and align with long-term forecasts. This ongoing adjustment highlights that passive investing is anything but stagnant.0
