When it comes to investing, there are two main routes you can take; passive investing and active investing. Your choice will have a significant impact on your investing journey so, here’s what you need to know about active investing.
It aims to beat the market
Active investors aim to outperform the whole market. What does this mean? Well, the market refers to an index, like the FTSE 100 or the S&P500, which provides a return based on the collective performance of all the companies in it (Aviva, Rolls Royce etc. in the case of the FTSE 100). Some companies might do really well, others not so well, so the market return is the average of all those performances. You could just accept the average return (known as ‘buying the whole market’) with a tracker fund, or you could try and pick the companies that you think will do the best and enjoy the potential returns. This would be ‘beating the market’ - by achieving overall annual returns higher than the market average.
It’s about picking individual investments
Active investing is about choosing individual assets you think will perform well and potentially help you outperform the market. Even if you don't know how to invest, there’s no right or wrong way to pick stocks and shares. Investment experts spend their days analysing market data before choosing their potential winners, but you could also just randomly pick your investments yourself. In 1973, Burton Malkiel, Princeton University professor, claimed that blindfolded monkeys throwing darts at a newspaper’s financial pages would do as well as investing professionals. In 1988, the Wall Street Journal conducted a controlled experiment to test Malkiel’s theory. For 14 years, WSJ employees and readers randomly chose stocks by throwing darts at a stock table and about 40%1 of the time, the darts method did better than professionals
It means more buying and selling
Whilst passive investing is about holding onto your investments over the long-term, active investing allows you to be more flexible and take advantage of market opportunities by moving your money to companies that are doing well. Buying and selling investments can be hard work and time-consuming, but if you’re willing to put in the hard work it might just pay off. Interestingly, men are more likely to trade than women. The research found that women trade shares half (49%)2 as frequently than men and typically favour a ‘buy-and-hold’ strategy.
2: Investment Week, Feb 2018 - https://www.investmentweek.co.uk/investment-week/news/3026206/women-outperform-men-in-investing-finds-hargreaves-lansdown
It can be costly
Picking your own assets doesn’t always come cheap since trading costs – the cost of buying and selling investments – can quickly pile up. You could avoid some of this by choosing to put your money in an actively-managed investment fund instead (a kind of virtual hamper full of investments selected by professionals). This way, an investing expert will do all the hard work for you, analysing markets, and picking the right assets. What’s more, trading costs are covered in the fund charge, so you only pay once for your investments, although platform and other charges might apply. As you’ve probably guessed already, active fund charges are typically higher, on average 0.9%3 a year compared to 0.15%3 for passive funds.
3: Telegraph, June 2017 - https://www.telegraph.co.uk/investing/funds/invest10000-pay14227-fees-fund-charges-erode-money-stealth/
It can be used to help make the world a better place
Our Ethical investment funds aim to filter out companies involved in activities harmful to society or the environment, and select those with high environmental, social, and governance (ESG) standards - are often actively managed. Fund managers will monitor everything from carbon footprint, the number of female employees, and whether the company is paying enough tax, and they’ll get involved as shareholders to ensure the organisation remains committed to maintaining and improving standards. And it doesn’t stop there. Funds typically have a third-party verification process carried out by an impartial organisation, to ensure that no bias creeps into decisions, and commission independent ESG company assessments to analyse the activities of the companies they invest in against strict criteria. Passive ethical funds, by contrast, simply apply a rigid ESG filter to an index, like the FTSE 100 to weed out companies which don’t meet strict criteria.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.