Investing strategy

If you invest in the stock market, there are two strategies for selecting which stocks are in your portfolio:

  • Active. This is where you make specific decisions to hold a position. This could be individual stocks chosen by yourself or an active fund where the fund manager decides what to buy. Either way, you make decisions to buy and sell based on whatever criteria you select.
  • Passive. This is where you buy units in a specific type of fund which tracks a published, external index. The underlying stocks in the fund are bought and sold in accordance with the rules of the index. They are also known as tracker funds.

Each strategy has a very different outcome on your total return over any time period. The fees associated with passive investing are low because there is no-one to pay to make decisions since they are mechanical and rules based. The overheads associated with running passive funds are purely administrative. This means that you get to keep more of your total return to reinvest for the future.

Active investing may outperform the market as a whole, or may underperform. The decision making of what to buy and sell also has a cost. Either in your own research time, or in an increased fee you pay to a fund manager or financial advisor.

For active investing to beat passive investing over the long term, it must deliver a total return of market plus fees over the same time period.

My own strategy is passive investing. I concluded a long time ago that I did not possess enough information to beat the market.

Of course, you these options are not binary. You could have a strategy with a blend of the two (e.g. 60% passive and 40% active).

Ultimately, a strategy should not really change over long periods (although individual moves to execute the strategy may differ). So you also need to understand the underlying goals you are trying to achieve through investing before you settle on a final investment strategy. This will be the subject of a future post.

Read more on this topic . . .


Disclaimer

I am not your financial adviser.

The information in this post relates to my financial journey. It may or may not be relevant to your own. You need to make your own decisions on your own financial strategy.

Do not buy or sell anything based solely on what you read.