In this weeks episode
- Defining passive versus active investing
- How we can deal with investment uncertainty
Some of the key benefits of passive investing are:
- Ultra-low fees: There’s nobody picking stocks, so oversight is much less expensive. Passive funds simply follow the index they use as their benchmark.
- Transparency where you have a true apple to apple comparison: It’s always clear which assets are in an index fund.
- Tax efficiency: Their buy-and-hold strategy doesn’t typically result in a massive capital gains tax for the year. Turnover can get extremely expensive for active investors as well.
Proponents of active investing would say that passive strategies have these weaknesses.
- Too limited: Passive funds are limited to a specific index or predetermined set of investments.
- Small returns: By definition, passive funds will pretty much never beat the market.
But active strategies have these shortcomings:
- Very expensive: Fees are higher because all that active buying and selling triggers transaction costs, not to mention that you’re paying the salaries. All those fees over decades of investing can kill returns.
- Active risk: Active managers are free to buy any investment they think would bring high returns. As a result more often than not they are wrong.
*Source: S&P Dow Jones Indices LLC. Data as of June 30, 2019.Returns shown are annualized.Past performance is no guarantee of future results. Chart is provided for illustrative purposes.
5 Ways to Deal with Investment Uncertainty
- Look at the Big Picture aka your financial goals.
- Have a broadly diversified investment portfolio. Own the whole world.
- Look at your risk level and emotions to help determine your asset allocation being appropriate.
- Educate yourself on the history of markets.
- Have a different perspective by looking at the bright side of what planning strategies you can implement now.
Call to Action
Reflect on and evaluate how you deal with investment uncertainty. Is that a healthy way? How could it be improved if needed.