Active verses Passive Share Investing
Active verses Passive Share Investing, which is better. In this comparison we’ll look at each alternative for investing.
What is Active Share Investing
Active share investing is the process of selecting then buying and selling individual shares you believe will outperform the market average. This can be done through research, software or newsletters.
There are two main approaches to analysing shares, fundamental and technical. Fundamental analysis looks at sales, profit, potential growth, return on equity and other data. This information is then assessed as to whether or not a particular company is a good investment. Technical analysis instead looks at charts to try and identify patterns and trends. This is then used to ascertain when best to enter or exit the market on a particular share.
I have tried this myself using research provided on a subscription basis. Fundamentally sound companies were recommended then technical analysis was used to decide when to buy and sell. It was a lot of work and I ended up breaking even (some did extremely well, others very poorly) and ultimately I under performed the market. Add in the subscription fee and I was in the red.
What is Passive Share Investing
Passive share investing is buying and holding a diverse range of quality shares over the long term.
ETF’s (Exchange Traded Funds), such as Vanguard’s VAS, are well suited to passive investing. VAS, for example, tracks the largest 300 companies in the Australian ASX.
One benefit is that you don’t need to pay for expensive subscriptions, software or newsletters. Another benefit is simplicity, you don’t have to be watching the price everyday and tax time is so much easier.
There are some exotic ETF’s out there that track a very narrow parcel of shares, so please be careful.
Outperforming the Market
There have been numerous studies that show it is very difficult to outperform the share market consistently over the long term.
According to the S&P SPIVA Scorecard, 79.94% of Australian Equity General funds underperformed the S&P/ASX 200 over a five-year period. It’s the same story for other countries too.
Active fund managers spend all day pouring over financial reports and carrying out technical analysis. If they can’t consistently beat the market over the long term what hope do we have.
Most people don’t realise the Australian share market has consistently returned around 8–10% per annum over 5, 10, 20, 30 and 40 years. This includes dividends reinvested. You can see the returns on the Vanguard Asset Class Tool. The US stock market has similar, slightly higher, returns.
As John C. Bogle, founder of Vanguard, says “Don’t look for the needle in the haystack. Just buy the haystack!”.
Our Investment Strategy
This is our philosophy for share investing and index fund ETF’s tick all the boxes.
Simplicity — We’re not lazy, but we have better things to do with our time than reading reports, studying charts and sifting through dozens of buy, sell and dividend statements at the end of the financial year.
Diversity — An investing fundamental, with three ETF’s we are investing in around 6,000 of the worlds largest companies in 48 countries such as Apple, Amazon, Microsoft, Facebook, Berkshire Hathaway, Nestle, Samsung, Toyota, Australia’s Big 4 banks, Woolworths, Westfarmers, etc.
Frugality — You can’t control the market but you can control your fees. Our 3 ETF’s have a MER (Management Expense Ratio) of just 0.075% per annum. That’s equal to 75 cents per annum for every $1,000 invested. Some fund managers charge a MER of around 1–2%. In our example of $1,000 invested that would be $10-$20 per annum as opposed to 75 cents.
Liquidity — Hopefully these investments are buy and hold for the long term, as well as regular investment top ups, but should you ever need to sell all or part of your portfolio the cash can be in your bank account within 2 days.
Final Thoughts
Trying to beat the market consistently over the long term with active share investing is extremely difficult and time consuming. Our preference is to take average market returns using passive share investing. It’s simpler, cheaper and with less hassle.
Thanks for reading and please don’t hesitate to Say Hello if you have any comments or would like any additional information. Yes, sign me up to your free newsletter.
Originally published at https://aussiemoneytips.com on May 20, 2021.
