Investing can be a complex landscape, particularly when distinguishing between active and passive strategies. Many individuals mistakenly equate passive investing with a completely hands-off approach. This perception is misleading, as even passive strategies require considerable oversight and management.
For example, our automated investing solution leans towards a passive model but incorporates both active and passive strategies. On any trading day, our platform may actively adjust asset allocations to adapt to changing market conditions.
Table of Contents:
Defining active and passive investment strategies
Understanding the differences between these two approaches involves examining their primary objectives and associated costs. Both strategies necessitate decision-making regarding investment choices, whether by retail investors or professional management teams.
Key objectives and costs
The fundamental distinction between active and passive investing lies in their goals. Active investing aims to outperform the market, a challenging task over the long term. For instance, when reviewing the S&P 500, only a small fraction—less than 15%—of actively managed funds consistently outperform it over five-year periods or longer.
However, active investing can still offer value. In inefficient markets, where prices may not accurately reflect true asset values, active strategies can excel. Notably, emerging markets and specific segments of the bond market can present opportunities for skilled investors to exploit mispriced assets.
Evaluating investment teams and opportunities
A critical factor in selecting an actively managed fund is assessing the management team behind it. Investing in such a fund means you are not just purchasing specific securities; you are also investing in the team’s expertise. Thorough research on their track record and capabilities is essential to make informed investment decisions.
Exploring niche markets
Additionally, some niche markets may lack suitable passive options entirely. A prime example is the Academy Veteran Bond ETF (VETZ), a recent addition to our investment offerings. This fund primarily focuses on providing loans to active and retired U.S. military personnel and their families, making it a viable choice for both active management and Socially Responsible Investing.
The appeal of self-directed investing
Many individual investors prefer to control part of their portfolios. According to a survey conducted with Betterment customers, approximately three-quarters of respondents indicated they engage in self-directed investing alongside their professionally managed assets. This strategy blend facilitates both excitement and education throughout the investment journey.
Selecting your own securities, even within a larger managed portfolio, can be both exhilarating and informative. This sense of agency leads to a significant difference between active and passive investing: the granularity in portfolio composition.
Understanding portfolio composition and index funds
In passive investing, stock indexes are constructed based on the current market capitalization of included companies. These capitalizations fluctuate, causing shifts within the indexes and the funds that track them. This self-cleansing mechanism allows lower-performing stocks to diminish in influence while stronger performers gain prominence, resulting in a markedly different S&P 500 composition today compared to two decades ago.
For example, our automated investing solution leans towards a passive model but incorporates both active and passive strategies. On any trading day, our platform may actively adjust asset allocations to adapt to changing market conditions.0
For example, our automated investing solution leans towards a passive model but incorporates both active and passive strategies. On any trading day, our platform may actively adjust asset allocations to adapt to changing market conditions.1
