Fees vs performance? Investment advisor or no advisor? Active or passive?…these are common considerations amongst today’s investors who have more choice than ever. What are these options and how do you decide what’s best for you? Here is some food for thought…
With active investing, a portfolio manager and their team will research various companies, sectors, geographies, etc. and build a tailored mix of stocks, bonds and other assets to create a portfolio for their clients. The thought process is to offer a portfolio that is heavily weighted in areas that are expected to outperform the market and less weighted in those that will underperform. The intended end result? A better return than the market itself or what’s known as the benchmark.
This all sounds great, but the resources used in active management aren’t free so the cost of these portfolios is among the highest. The biggest questions to ask are…can the portfolio manager time the market such that the portfolio will beat the benchmark? And, will it beat the benchmark by a higher amount than the added cost?
Passive investing is the opposite. Instead of making educated guesses on what will over or under perform the market, these portfolios are built in the exact weighting of a particular market itself. These funds can be based on a major index like TSX, or can be a subsection of an index, sector or geography.
Whereas an active portfolio has the possibility to provide higher returns than the benchmark (or greater losses), passive funds will provide the same returns as the benchmark of the market it is replicating. Since passive investments require less resources, their fees are much lower. As such, even if the funds aren’t surpassing the benchmark, the net effect can sometimes be greater (or less negative in a down market) than active.
A trend that has gained popularity with the evolution of technology is Do-It-Yourself Investing – there are a lot of new platforms where you can try your hand at building your own portfolio, whether it’s made up of passive and/or active funds.
Overall, this is the least expensive form of investing. That being said, you need to know what you are doing and be diligent in reviewing your portfolio frequently and researching the various options available to you. There is nothing worse than going on vacation and coming home to see that your stocks tanked while you were on the beach!
Which Option is Best?
At the end of the day, the best option is the one that makes you most comfortable…but having a trusted advisor to help you manage the bigger picture will ensure all of the pieces of the wealth puzzle fit properly together. After all, wealth is made up of more than just investment returns and fees…it’s a long-term strategic plan involving investments, insurance, taxes, retirement and so on, all working in conjunction to support your vision of the future.