Updated: Jun 10
Did you know that, according to annual research by the S&P Dow Jones, nearly 84% of all U.S. stock funds under-perform their benchmarks over a five-year period? That means, in many cases, people could do better than their professional money managers by simply buying and holding a diversified basket of stocks, such as an index fund. Therefore, if you are new to investing, one of the first decisions you'll need to make is which investing strategy to pursue. Passive investing, which consists of buying and holding a diversified basket of stocks, seeks to minimize fees and reduced the risk of under-performance that can come with frequent trading. Active investing, on the other hand, takes a more hands-on approach. It involves deeper analysis and expertise, and aims to take advantage of price movements in order to outperform the average return of the market. Each strategy has it's own pro's and con's, so it's important to consider each of them before deciding on one. We've put together a table below to help you compare them:
In general, passive investing makes sense for people who a) have low tolerance for risk (i.e. they are more interested in preserving their wealth than growing it) or b) don't have the time, energy, or expertise to invest actively on their own and are unable to find a manager capable of outperforming their benchmark over the long-term. And given that so many professional managers under-perform, we think this strategy is appropriate for the majority of investors. To learn how to invest passively with minimal fees, visit our blog post "Invest Better: Passive Investing Done Right".
But not all active managers under-perform. And some have outperformed the market by a wide margin over a long period of time. The most notable example is Warren Buffett who, as of 2019, had outperformed the market by an average of 10.3% annually since 1965. And if you find a manager that outperforms, they can be well worth the money. Consider this, if you have a $250,000 portfolio, a 2% increase in annual returns could result in more than $350,000 in additional gains over twenty years*, as shown in the chart below:
That is why finding the right investment advisor is so important. But finding a great advisor isn't easy. To learn the four things you should look for in an advisor, check out our blog post "Invest Better: How to Choose the Right Active Manager". And if you have any questions you can send me an email at email@example.com or schedule a free, 15 minute phone call using the button below.