Camille Van Vyve
14 Mar 2024
Are you an active or a passive investor?
Easyvest specializes in passive investing. Yes, you know, but is "passive investing" really no longer a secret to you? What makes the active investor different from the passive investor? Today, we dot the i's and cross the t's on the topic.
Performance, yes, but not just any
Although financial return is obviously sought by any investor, whether active or passive, the objective pursued by the one or the other is fundamentally different, and therefore also their investment behavior. The active investor strives to try to beat the market by profiting from short-term fluctuations, while the passive investor simply seeks the long-term return of the market.
Player vs. follower
As a result, the composition of their portfolio differs, as does its evolution over time. As the name suggests, the active investor (or his manager) is always on the alert. He often invests directly in a relatively concentrated basket of assets, linked to his knowledge of the market and the time he is able to devote to it. Through its quantitative and qualitative analyzes, he determines when to buy or sell a particular asset. To be a "good" investor, he has to be right more often than he is wrong. Conversely, the passive investor exposes himself through a small number of diversified funds to a wide range of assets and keeps them as long as possible in the portfolio to benefit from the overall market return. He ignores short-term fluctuations because he knows that the market is unbeatable in the long term.
Passive investing: the pros and cons
Passive investing has two major advantages: transparency and cost. The process is indeed crystal clear: you buy and keep stocks of thousands of companies from all over the world (via an ETF index fund, for instance) in order to expose yourself to the global market. The return obtained therefore does not depend in any way on your knowledge or the time spent managing your portfolio. In addition, this investment strategy requires few transactions, which keeps the costs associated with your portfolio to a minimum. On average, in 2019, Morningstar estimates the cost of mixed active funds (equities + bonds) in Belgium at 1,67% of the amount invested per year. In comparison, ETF traded on Euronext cost 0,3% per year on average. The downside to passive investing? You profit from the stock market return - about 7% per year over the long term - but cannot benefit from the windfall on winning "hits" or "bets".
Active investing: the pros and cons
The advantage of active investing is flexibility. You or your manager decide which asset to hold in the portfolio and for how long. At any time, you can choose to buy or sell a particular security. But this strategy is inherently more expensive than the previous one, since each transaction has a cost. In addition, the risk of making mistakes, and therefore losing money rather than obtaining above-market returns, is also greater than in the case of passive investing. For this reason and given the necessary personal involvement, active investing finally carries a greater emotional charge than passive investing.
ETFs at the heart of passive investing
A private investor, of course, cannot himself buy shares of all the listed companies in the world - that would be inefficient and much too expensive! It is for this reason that ETFs or Exchange Traded Funds were born, funds listed on the stock exchange that track the performance of stock market indices. Investing in these funds is like buying shares of all of the companies underlying the index being tracked, regardless of the amount invested. Their popularity has only grown in recent years: at the end of 2020, there were no less than 7.600 trackers worldwide, with a total of $7.740 billion invested.
Easyvest and modern portfolio theory
Stemming from the modern portfolio theory articulated by Harry Markowitz in 1952, which places diversification at the center of portfolio construction, passive investing is the most rational way to invest in the financial markets. Easyvest has made this its specialty because we are convinced that nothing can produce better returns in the long term. Since 2016, we have positioned ourselves as the champion of passive investment in Belgium, with a simple and transparent offer accessible through a state-of-the-art digital application.
Note: This article was written when Easyvest was authorized and regulated by the FSMA as an agent in banking and investment services.