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Active or Passive Investment? Which is Best for Your Retirement?

Passive investing

Passive investors take a somewhat back seat approach – for example, by holding onto investments for the duration of their investment time horizon – in order to match the performance of certain market indexes rather than trying to outperform them.

The theory has it that once you are invested in the market you wait, and that is that. Proponents of the passive investing strategy argue that over time you will outperform active investors, who in contrast to passive investors lose discipline and sell-up or alter strategy during times of market volatility, thereby losing out on gains over the longer term.

Furthermore, because a passive approach requires less action, it may attract fewer fees than active management. However, it is worth remembering that even a passive strategy requires an active approach at the beginning; how else do you decide upon the mix of assets that constitute your retirement portfolio?

Active investing

Active investing involves a more tailored approach – i.e. one that is built to the specific retirement investment goals of the individual and generally utilises a portfolio manager whose aim is to beat the stock market’s average returns.

In short, this means that risk is managed in a much more focused, analytical way which aims to benefit from short-term fluctuations to enjoy greater growth by outperforming the market.

However, active management for the individual investor can come at a higher cost, be less tax-efficient and may result in a less disciplined approach during times of market volatility, otherwise known as knee-jerk reactions in trading.

Good financial advice matters

It is common for active investors and passive investors alike to be convinced they can remain disciplined to their retirement investment strategy even during the most challenging and volatile of times. However, DALBAR’s annual study, The Quantitative Analysis of Investor Behavior (QAIB), finds that the reality is different and that the bad timing of average investors who withdrew funds in 2018 resulted in losses of 9.42% on the year when compared to an S&P 500 index which was down only 4.38%.*

The Chief Marketing Officer at Dalbar, Inc, Cory Clark, said, “Judging by the cash flows we saw, investors sensed danger in the markets and decreased their exposure but not nearly enough to prevent serious losses. Unfortunately, the problem was compounded by being out of the market during the recovery months. As a result, equity investors gained no alpha, and in fact trailed the S&P by 504 basis points.” *

For the lay investor, the only way to guard against the possibility of short-cycle investing and emotionally volatile investing is to place their retirement portfolios in the charge of a professional advisor who can provide guidance, support, discipline and real understanding of the markets.

Blacktower (US) LCC for Retirement Investment Management

The team at Blacktower (US) LLC understands the unhelpful traps that investors can fall into when invested in the market.

We provide specialist financial advice so you can have confidence that your retirement investment portfolio is structured in the way that best suits your long-term objectives and future spending needs.

For help and information, contact us today.

 

* https://www.dalbar.com/Portals/dalbar/Cache/News/PressReleases/QAIBPressRelease_2019.pdf accessed 28-08-19

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