Active vs. Passive

There is a wealth of academic evidence which concludes that the vast majority of active fund managers do not out perform the market average.  The alternative is to invest into a passive, index tracking fund that is designed to deliver market average returns and for a fraction of the cost of investing in an actively managed fund.

Market-timing and performance-chasing are losing strategies – Buying and selling frequently hoping to ‘catch the wave’ as the value of investments rise and fall is very difficult. To achieve success it is essential that the timing is right – both going in and coming out. Otherwise, there is significant risk, not to mention the significant transaction costs. As many investors say: it’s time in the market, not timing the markets that counts. Also, market fashions change – often very suddenly. There is no guarantee that a performance-chasing strategy, asset class or fund that has performed well will continue to perform well next year, next month – or even tomorrow.

Consistently outperforming the financial markets is extremely difficult – Economic uncertainties, random market movements, and the rise and fall of individual companies mean it is extremely difficult for anyone – including professional investors – to beat the market in the long term. An active manager will buy or sell investments in order to meet a particular investment objective. As a result actively managed funds have higher operating and transaction costs which can eat into returns. It makes sense to invest in low cost funds that follow an index.

Minimising cost is vital for long-term investment success – Costs matter, as each pound spent on charges is a pound taken out of an investment’s value. By keeping costs to a minimum potential returns can be significantly improved – especially when compounding over time is taken into account.

To find out more about the passive investments that we use in our portfolios call us on 01666 861194 or email us at info@proposito.co.uk

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