Singapore-based financial blog that aims to educate people on personal finance, investments, retirement and their Central Provident Fund (CPF) matters.

Monday, 3 April 2017

Active or Passive Way of Investing?

Active Investing versus Passive Investing

This is the battle that is happening on Wall Street since 1975 when John C. Bogle started the first fund company, The Vanguard Group, in the United States (US) offering to mom-and-pop investors low-cost index funds that aim to mimic the US index returns and charge extremely low cost for it (like 0.1% of the asset per year).

Before 1975, active trading (or active fund management) was the only thing available to investors who wished to get someone to managed their money. These active funds seek to achieve above market returns for their investors, and in return they charge high fees (from 2% to 20% of the profits per year).

At the beginning, everyone was skeptical of the idea of an Index Fund, because it gives investors only market returns, not spectacular returns above the market rate. People are greedy and just cannot take it that they are going to get average returns. They want the big returns that active management promises.

Fast forward to 2017 today, 42 years since the first US index fund was launched, we have more than 1000 index funds in the world tracking different indexes, excluding index ETF that trades on the stock exchanges. Funds managed by these passive investment products/tools surpassed the amount managed by the actively-managed investment funds - investors are pulling funds out of these funds fast and investing them into index funds. This happened because the active funds are no longer able to provide above market returns after cost. It is becoming better to be average than to be sub-par.

However, that is not to say that active investing is dead. While many have failed, there are also those that have succeeded and are still doing relatively well. George Soros, Carl Icahn and Warren Buffett are just some examples of people who did really well actively investing their money.

What is Active Investing?
Active Investing means actively looking for good companies to invest in, hoping that it will perform better than the market and hence earn you a higher return. You can do this yourself or by hiring a professional money manager to do the job for you.

Basically, you are looking at all the stocks in the market and looking for undervalued companies to buy or overvalued companies to sell short. Instead of buying the whole market and achieving average returns, you hope to get above market returns by identifying and buying those companies that will outperform the average.

What is Passive Investing?
Passive Investing means passively investing your money in buying the entire market via an index (think S&P500). You do not care how each stock performs and you do not really care which company makes it into the index and which are dropped. All you need to know is that over the long term, the stock market is and will go up and that your money will grow with it - just not at an above the market rate.

You can do this yourself manually, buying up all stocks in the index in the proportion of their market capitalisation (you have to be very very rich to do that) and re-balance it yourself every half year or you can just invest in an index fund that is managed by a group of professional managers who charge really low fees (because they don't really need to do much except re-balancing the fund every half year).

With Passive Investing, you are not trying to find the needle in the haystack, you are buying the whole haystack. Instead of looking for a really good company, you buy all the companies because the majority of them are going to do well that they will cover the bad ones and also make you good returns.

S&P500 price chart from 1950 to 2013
Are you now slightly convinced that Passive Investing works?

What are the differences?
Personally, these are the difference to me

Active Investing VS Passive Investing

Active Investing (Self)Passive Investing
Monitoring Consistently monitoring of
stock performance

See at the start and close of the
market OR
don't even look at the market at all

Strategy Research, buy, then sell when
the time is correct

Buy and hold until you need money
then you sell

Beat the market before cost
Beat the market after cost

Get market returns before cost
Less than 1% below market returns
after cost
Lifestyle Quite stressful, especially if
you are losing money on
your positions

Sleeps like a dead log because over
the really long-term, you know your
money will grow

Incur lots of trading cost
If you are investing with a
fund, they charge a 2% asset
management fee and a 20%
cut on your profits

Less than 1% of your assets' price
Have to do your own trading
research and analysis, hence
more effort

No effort other than finding a low
cost index fund provider

Which do we suggest?
I would like to quote from a famous fund manager Kenneth L. Fisher, who have written many New York Times Best Seller Investment Books: "Active if you know what you are doing, passive if you do not!"
That being said, a lot of you will think that because I have read so much and attended so many courses, I will know what I am doing.
Not to rain on your parade, but there has been research that says that monkeys throwing throws darts at random stock tickers could actually outperform experts financial managers (I'm serious, you can Google it).

Active Trading vs Long-Term Investing

Peek into the minds of some of the great investors in Singapore and learn from them their investing style, their investment criteria, and their views on investing!

Learning Points:
1) Is active trading more superior or is passive investing more superior?
2) What techniques should I use if I am an active trader?
3) What strategies should I use if I am a passive investor?
4) What is the risk for each of the techniques and strategies I use?
5) How can I improve my techniques and strategies?

Ronald K- Self-made millionaire investor
- Featured in Sunday Times twice for his approach to investing
Gabriel Yap - Executive Chairman of GCP Global
Kelvin Seetoh - Business Analyst of 81 Holdings

Event Details:
Date: 8 April 2016 (Saturday)
Location: MND Auditorium, 9 Maxwell Road, SG 069112
Time: 09.00AM  1.00PM (registration starts from 8.30AM)
Price: $10 

*Refreshments provided

Click HERE for more information on the event!
Click HERE to sign up for the event!

Limited Seats Only! Sign Up Now!

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