April 6, 2018

Passive Investment Strategy – The answer for a safe retirement

 

When it comes to investing, many consumers wonder whether they should choose passive or active funds for their retirement portfolio. For me, passive investing is the only sensible way to invest

 

It is no secret that saving for retirement is essential, and starting as early as possible is the secret to a more fruitful retirement. Despite all the complicated algorithms and confusing terminology, there are really only two investment strategies: active and passive. To invest ‘actively’ is to entrust your money to a fund manager, who will use their expertise and insight to choose a series of stocks, shares and investment opportunities that they hope will beat the market by delivering returns in excess of the market. To invest ‘passively’ is to ignore managers and simply track the market’s movements by investing in products like Exchange Traded Funds (ETFs) or choosing a basket of stocks and shares, which mirror overall stock market performance.

 

Both styles of investing are popular, but they each have their own specific advantages and issues. We’ve put together a few of the most commonly cited pros and cons of both active and passive investing, enabling you to decide which one may be right for you.

 

Active funds have notoriously high fees, with most managers sending you an annual bill, even if their strategy has lost you money. On top of this, active managers may also take a cut of any profits, so while you may think you’ve made a 10% profit, after fees and commission it may be 6% or less. Add inflation of 6% to that and you may actually have 0% return.

 

Passive investing is one of the cheapest way to access the market, with minimal fees and none of the hefty fees and charges that come with hiring an active manager. That means that any money you make is all yours, except for a nominal admin fees (typically less than 1%). This is especially true if you are prepared to invest your money over a long period of time, such as for your retirement income. In this case, the stock markets have historically delivered great results.

 

“Current statistics show us that only 6% of consumers will be able to retire comfortably on a salary (after settling all debt) that they’re accustomed to while they were working. There are, however, many reports that state that this has worsened and is sitting at about 3% now,” says Lance Solms, Managing Director at Itransact. “With a passive investment, you always know where your money is and what it’s doing, and you can remove and reinvest it with relative ease. The main advantage of passive investing is cost. The total annual charges are low – in most cases they can be under 1%. So for investors wishing to minimise the friction of annual charges on returns, passives represent a logical strategy. The other main advantage of passives is simplicity”.

 

Pros of Passive Investment Cons of Active investments
  • Likely to perform very close to index
  • Generally lower fees
  • Transparent cost

 

  • Potential to underperform index by far
  • Generally higher fees
  • Opaque costs

Passive investments don’t try to beat the market, but because of their lower costs they often end up beating active investments that try.

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