Saving vs investingWatch now →
What to consider before investingWatch now →
Investing vs tradingWatch now →
Types of investments and risk vs returnWatch now →
What’s your risk profile?Watch now →
Set your investment goals to decide how you will investWatch now →
Know how much you’re paying in feesWatch now →
How to build a portfolioWatch now →
How often should you invest?Watch now →
Keeping track and managing your portfolioWatch now →
Course key takeawaysWatch now →
Lesson 7 transcript
Here, we explain a few different ways you can approach investing. You may find that your investment style is a mix of the below, especially over time as your financial goals change, as you grow older – or as you learn more about investing.
Active vs Passive
There are two main philosophies when it comes to investing. The approach that resonates with you is likely to become the bedrock of your investment strategy.
There’s no ‘right or wrong’ approach, and you can incorporate both within your overall investment portfolio. Ultimately, the approach you choose may come down to a few things:
- Your time and dedication to investing, or how ‘hands on’ you want to be
- How much you’re willing to spend on fees
- Your tolerance to risk
Active investors try to identify good companies (or other assets) to invest in, with the aim of outperforming a broad market index, such as the ASX 200, the S&P 500 or the Nasdaq.
Stock-picking is more difficult than it may seem
This approach requires lots of research and confidence when making investment decisions, and typically involves higher risk. This is why some active investors choose to pay the ‘experts’ – professional fund managers to actively manage their investments on their behalf.
Actively managed funds typically have relatively high management fees, sometimes with an additional performance fee for those years when they outperform the benchmark index.
Over the years, fees can really eat into investor returns.
The potential for actively managed funds to outperform the market comes down largely to the skill of the fund’s investment manager, and to the fees they charge.
Being an active investor, and choosing investments like individual stocks, can be overwhelming. The seemingly endless opportunities and the pressure to ‘make the right choice’ can make for ‘analysis paralysis’.
So, if you want to invest your money in stocks, but don’t have the expertise or time to select specific companies yourself, or the budget to spend more on fees for an active fund manager, passive investing – usually by investing in an ETF – is a popular option.
Passive investing is often seen as a cost-effective way to invest, and tends to suit those who would rather take more of a ‘set and forget’ approach and have a lower risk tolerance than active investors.
A passive investor typically has a buy and hold mentality, trading minimally with the goal of building their wealth over the long-term and ignoring short-term setbacks or market downturns. Their aim is to track the performance of a market index in anticipation that their portfolio will appreciate over time.