What Is Active Investing?

Ever wondered how fund managers decide what to buy and sell — and whether they can really outsmart the market?

Well, that's the essence of active investing: a hands-on approach where fund managers actively pick and trade investments, aiming to beat average market returns (rather than simply tracking them).

As the name may have already given away, active investing is the opposite of passive investing. With passive investing, funds follow a market index instead, and let it do the work.

Here's the thing, though: while active managers work hard to outperform the market, not all of them succeed. Some do brilliantly, others don't; and it's worth remembering that past performance isn't a reliable indicator of future results.

Markets are – famously – unpredictable, and even the most experienced managers can't guarantee they'll beat the benchmark every time. But why does this matter to you? Because understanding the difference between active and passive investing can help you make smarter decisions about your finances, whether that’s an ISA, pension, or other type of investment you might have.

It doesn’t matter if you’re just starting out or reviewing your existing portfolio. Either way, knowing how these strategies work and – crucially – what they cost, puts you in the driver’s seat.

At Wealthify, we aim to give you the best of both techniques. We use a blend of both active and passive investing across our Investment Plans to help spread your benefits – and risk – while also keeping costs reasonable.

In this article, we'll break down exactly how active investing works, weigh up the pros and cons, compare it to passive strategies, and help you figure out which approach (or combination of both) might suit your goals.

• What is active investing and how does it work?
• Active VS passive investing
• The benefits of active investing
• The disadvantages of active investing
• Active investment strategies
• How to get started with active investing

What is active investing and how does it work?

So, what is active investing and how does it actually work?

As touched upon above, active investing is all about trying to beat the market. Professionally, this is undertaken by fund managers, but anyone can technically give it a go.

Done well, active investing requires expertise, time and a strong nerve. To pursue it, you need to choose specific investments with the aim of outperforming broad indexes such as the S&P 500, or FTSE 100.

How to do this? Research, analysis, and – in the end – judgement.

There are many variables which can be taken into consideration, from company earnings to global economic trends, which then inform decisions about whether to buy or sell.

If successful, you could achieve higher returns than the market average.

For example, if a fund manager believes that UK tech companies are undervalued, they might shift more of your investment into that sector. If conditions change, they can quickly adjust the fund’s holdings in response – which is something that passive strategies don’t do.

This flexibility is a key feature of active investing. But it comes at a cost, as active funds typically charge higher fees due to the ongoing management involved.

And ultimately, success often depends on skill, timing, and a fair bit of market luck.

Active vs passive investing

Passive investing takes a different approach. Rather than trying to beat the market, it aims to match it.

Passive funds track a market index and automatically invest in the same companies listed in that index. It’s a buy-and-hold strategy that doesn’t change much, even when markets move.

One way you can think of this is like cooking with a recipe book.

You follow the instructions step by step, using the exact ingredients listed. It’s simple, reliable and cost-effective.

Active investing, on the other hand, is more like hiring a chef. They adjust the menu daily based on what’s fresh, what’s in season and what’s selling well. It costs more, but the goal is a better end result.

Sometimes they get it right; sometimes, the set recipe might have been more reliable than an experimental dish that didn’t pay off.

Both strategies have their place, and understanding the difference can help you choose the mix that suits your time, goals and appetite (for risk, rather than dinner!). Of course, it’s important to remember that all investing comes with risk and the value of your investments can go up as well as down.

The benefits of active investing

One of the main benefits of active investing is its flexibility. Because fund managers aren’t tied to a fixed list of investments, they can respond quickly to changes in the market. This approach can offer several potential advantages, particularly for investors looking for more than just average returns.

Some of the key benefits include:

• Risk management. Active managers can adjust portfolios to reduce exposure to areas they believe are underperforming, or to take a more defensive position during market uncertainty.
• Short-term opportunities. While passive funds stay fixed to an index, active managers can take advantage of sudden price movements or emerging trends.
• Personalised outcomes. Active investing can be tailored to specific goals, whether that’s generating income in retirement, targeting a particular return, or investing in specific sectors or themes like sustainability or technology.

While there’s no guarantee of outperformance, active investing gives fund managers the tools to be more responsive, which can be valuable in fast-changing or uncertain markets.

The disadvantages of active investing

While active investing can offer flexibility and the potential for higher returns, it’s not without its drawbacks.

For many investors, especially those new to the market or short on time, these challenges can be off-putting. Here are some of the disadvantages of active investing to keep in mind:

• Greater risk. Because active strategies involve making judgment calls about when to buy or sell, there’s more room for error. A wrong call can lead to underperformance, particularly during volatile market periods.
• Higher costs. Active funds typically come with higher fees. These cover research, analysis and regular trading activity. Over time, those charges can eat into your overall returns.
• Time and attention. Successful active investing demands regular oversight and deep market knowledge. For everyday investors, that level of involvement isn’t practical. This is where having a portfolio managed by an investment team can help by doing the heavy lifting on your behalf..

Active investing isn’t about constant wins – it’s about balancing potential rewards with the higher associated cost (whether that comes in the form of fund manager fees, or the time it demands from you to manage your portfolio personally).

Active investment strategies

Once you understand how active investing works, the next step is knowing the different approaches fund managers might take. Not all active funds follow the same playbook.

Here are four common strategies you’re likely to come across:

• Growth investing. This strategy focuses on companies that are expected to grow faster than the market average. Fund managers look for businesses with strong potential, even if they appear expensive today. Think of innovative start-ups that are reinvesting profits and expanding rapidly.
• Value investing. Here, the goal is to find companies that are undervalued by the market. These shares may be trading for less than they’re worth based on fundamentals like earnings or assets. Managers using this approach aim to buy low and wait for the market to catch up.
• Momentum investing. This method relies on trends. Managers look for stocks that have performed well recently and try to ride the wave onto further gains. The idea is that strong performance often maintains momentum – at least in the short term.
• Contrarian investing. As the name suggests, contrarian investors go against the crowd. They buy when others are selling and avoid hype. This strategy involves spotting opportunities in overlooked or unpopular areas and waiting for a turnaround.

Needless to say, each of these approaches has its own strengths and risks. The right mix for you will depend on your goals, your attitude to risk, and how much involvement you want in the process.

How to get started with active investing

Before diving into active investing, it's worth taking a step back to decide if it’s actually right for you.

Start by thinking about your risk tolerance. Active strategies can offer higher potential for returns, but they also come with more ups and downs.

Let’s go back to that food analogy: Can you stomach some dodgy dinners in pursuit of a five-star meal?

If you're uncomfortable with uncertainty – especially as this is about more than just food, and the money you’ve worked hard to save – a more balanced approach may suit you better.

Your investment timeframe matters, too.

Active investing – like most investment strategies – is generally suited to medium or long-term goals, as markets can fluctuate in the short term. And while you don’t need to be an expert yourself, active strategies do require a certain level of knowledge and confidence.

If you don’t have the time or confidence, you’ll likely want a trusted manager to handle it on your behalf (so make sure you to take into account potential fees, as well).

At Wealthify, we have a low-pressure option for those who want to do more with their money than save, but don’t have the time or expertise to get into investing themselves.

Our investment plans use a blend of both active and passive strategies, which means you can benefit from expert decision-making without needing to manage the details yourself.

We do all the heavy lifting – from researching opportunities to adjusting your portfolio when markets shift – so you can focus on the bigger picture.

If you’re ready to put your money to work, visit our Why Invest with Wealthify page to learn how we can help you get started.

References

1. The Guardian | UK households put a record £103bn into Isas amid ‘dash for cash’