A generation ago, investing was much more expensive and limited.
But as markets and investment products develop, more opportunities open up for regular families to invest, with “passive” investing becoming a popular option, both in Australia and overseas.
Passive investing sounds almost like a contradiction – how can you be passive about something as important as investing?
There are two main forms of investing;
Most people are familiar with traditional “active” investing, which involves investment specialists closely monitoring markets and buying and selling shares according to their predictions for how companies will perform. Passive investing removes the human element of deciding what to own and when to own it, instead laying down a set of rules that drive investment decisions. Rather than trying to actively “beat the market”, a passive investor will try to “own the market”.
To “own the market” means owning a little piece of everything, and this is made easy by Exchange Traded Funds, or ETFs. An ETF is an investment fund that is itself traded on the stock exchange, and investors can buy shares in that fund. For example, an ETF that follows the top 200 stocks on the Australian sharemarket will buy and hold those stocks, and an investor can buy a share in that fund, thus having exposure to 200 stocks without having to buy them all individually. As new stocks enter the top 200 and others fall out, the fund will buy and sell them accordingly.
Passively “owning” or “following” the market has risen markedly in popularity in recent years. It gives exposure to a broad range of assets at a lower cost than many active funds, because when you don’t try to beat the market there is no need for an army of highly-paid investment analysts. On the other hand, a passive approach only follows the market; it won’t achieve returns in excess of the market, and it may be unable to avoid occasional market dips which an active fund can prepare for and try to avoid.
Some funds combine elements of both passive and active investing, being largely driven by rules that follow an index but with some level of active management. That way they get a combination of the benefits and the costs of both passive and active investing.
Rather than being dedicated to passive or active investing, we believe that the advantages and costs affect different investors differently, and the correct approach should be based on an investor’s individual situation. Passive and active investment strategies are both important tools in wealth creation, and our role here at Quest Advisory Group is to build the toolbox, fill it with the right combination of tools and know when, and in what magnitude, to use them.
To find out how these strategies can boost your wealth, contact Quest Advisory Group today on 1300 120 455.