A common question asked in the financial planning and investing world is: what is the difference between index and active investing?
Index Investing
Put simply, index investing is an investment style designed to mirror a particular market (the Australian share market or international share market for example) and the performance of that market as closely as possible. This investment style is very diversified as your money is invested in lots of different companies in small amounts.
Active Investing
Active investing on the other hand is where a professional manager (or team of managers) is deployed to personally select investments to try and outperform the return of the market. This style comes at a higher cost purely due to accessing the chosen manager’s expertise and their time researching their stock/fund selections. This investment style is less diversified as your money is invested in a more concentrated manner with larger amounts in each company.
Which approach is best?
Outperformance of the market benchmark by active investment funds happens frequently, absolutely. But to do this consistently over the long-term, after fees, is another thing. That is why the index approach to investing – being broad diversification in a low-cost manner – is the real winner in the end, as long as you as the investor have the discipline and can stay on the investment course.
Michael Gault
Senior Adviser