You pay your active investment manager a reassuringly high fee to manage your money, they scan the market, have a benchmark to beat and you’re expecting some strong returns. But successful active managers rely on judgement, experience and investment technique; how many actually manage to generate above-average returns on a consistent basis?
In contrast passive investments aim to replicate the performance of an index. The lower charges offer an appealing alternative; after all cost is the only guarantee in investments.
1. Low-cost passive investments
The main advantage of a passive investment is the cost. According to the investment association the annual charges on active funds are 1.59% when transaction costs are factored in. Conversely a passive investment, such as an exchange-traded fund (ETF) could cost you as little as 0.1%.
Cost should always be looked at in relation to returns, there is little point in paying 1.59% for 2% returns if you can pay less and achieve a similar level of returns. In the current investment environment many active managers are taking on more risk to have the potential of higher returns, but with risk also comes the higher chance of potential losses.
For investors looking to limit the impact annual charges have on returns a passive investment is the logical strategy. In today’s income-starved market investors need to be more cautious of cost than ever before, it is really difficult to justify fees approaching 2%.
2. Passive investments are more simple
When you buy a passive investment you know exactly what you are getting. You know which index it is tracking and you can see the performance on a regular basis. With Moneyfarm our performance is updated daily, if you wanted you could see how each ETF in your portfolio is performing on a daily basis.
Many active managers update investors on a much less regular basis. This varies by manager but it could be once a month, once a quarter or even once a year. This could leave you scratching your head as you fork out management fees but can’t really see what’s happening with your money.
3. There are good and bad active managers
There are some really fantastic active managers out there but for every good one there is a terrible one. The difference in performance between them could be huge over the long term. With a passive investment you know what you are getting, you should receive a similar performance to that index.
There are good and bad funds in both the active and passive investment universe. If you’re in any doubt of whether it’s a ‘good’ investment seek advice. Moneyfarm provide advice to all users, we let you know your investor profile and the portfolio that would best suit your needs before you’ve paid us a penny.