The world of investing can be complex, especially when considering the differences between active and passive strategies. While ‘passive’ suggests minimal involvement, the reality is more nuanced. Many investors believe that passive investing requires little engagement, but this assumption may not hold true.
Our automated investing service utilizes a blend of both strategies. While it primarily leans towards passive management, it conducts daily trading activities. We also regularly adjust asset allocations to align with current global market trends and long-term forecasts.
This raises a critical point: is passive investing truly as inactive as it appears?
Table of Contents:
The facts
At its essence, both active and passive investing revolve around decisions regarding fund allocation. The key difference lies in their objectives and associated costs.
Active investing: seeking higher returns
Active investing seeks to outperform market benchmarks, a daunting challenge over time. For instance, the S&P 500 serves as a benchmark for large-cap U.S. stocks. Research indicates that fewer than 15% of actively managed funds outperform this index over five-year periods or longer. Nevertheless, active investing remains relevant, particularly for those who favor long-term strategies with lower risk.
Some markets, especially less efficient ones, offer opportunities for active investment. Investors can leverage expertise and access to critical information to potentially uncover hidden value in emerging markets or specific bond sectors.
Choosing the right team
Investors in actively managed funds are not just selecting securities; they are also placing confidence in the management team’s capabilities. Conducting thorough research on the team’s experience and historical performance is essential. Our strategy for incorporating actively managed ETFs involves rigorous evaluation based on both quantitative and qualitative analyses of the teams involved.
Passive investing: a different approach
Passive investing generally entails tracking a specific index, such as the S&P 500. Stock indexes are weighted based on the market capitalization of the companies they represent, leading to dynamic changes over time. This self-regulating mechanism allows lower-performing stocks to decrease in significance while stronger performers gain prominence within the index.
Additionally, hybrid models known as smart beta strategies exist. These involve fund managers starting with a predetermined index but actively adjusting it based on various quantitative factors. One example is the Goldman Sachs Smart Beta portfolio, which focuses on companies that meet specific investment criteria.
Bridging the gap between active and passive investing
Many investors today recognize the value in combining both investment strategies. At Betterment, we acknowledge this duality, understanding that each approach has its benefits for wealth accumulation. Our clients often express a desire to manage a portion of their investments, facilitating personal engagement alongside professionally managed portfolios.
A survey of Betterment users revealed that approximately 75% of respondents participate in some form of self-directed investing while utilizing managed investment services. This combination not only adds an element of engagement but also serves as a valuable educational experience for investors.
Our automated investing service utilizes a blend of both strategies. While it primarily leans towards passive management, it conducts daily trading activities. We also regularly adjust asset allocations to align with current global market trends and long-term forecasts. This raises a critical point: is passive investing truly as inactive as it appears?0
