By Jack N., FocusShares Communications Analyst and Blog Contributor
Today, I’ll examine the sometimes contentious debate between active investors and passive investors and suggest that, yes, we can all peacefully coexist.
You Know You’re An Active Investor If …
Some of my best friends swear from their research that they know what the next big investment will be. They’ve spent months pouring over company income statements, economic analyses and analyst reports downloaded from the Internet. Their quest is to discover a company in a sector of the economy that’s been largely ignored and that they think will lead the way.
These are the activists of the investing world. Confident of their stock picking powers, and market analyses, they boldly go about trying to beat stock market averages.
The Passive Activist
Other active investors take a bit more passive approach with their active investing. Worried that they don’t have the time to do all of the research needed to find strong performing companies or sectors, they might turn to a money manager or an actively managed mutual fund.
But whether you’re an active activist or a passive activist, the goal is the same: beat the markets.
You Know You’re a Passive Investor If …
I remember when I used to call the CFOs of small companies whose stocks I held asking them why their share prices plummeted and what they were going to do about it. Eventually, I stopped the calls and the activist approach after realizing I didn’t have what it took to beat the market. The market beat me.
It’s not always out of personal experience and frustration that leads investors to passive investing . Most passive investors have become that way because they put their faith in studies showing that, in general, active investing underperforms passive investing. It sounds simple – even simplistic – but a passive investor simply tries to match the market averages, minus investment fees. A lot of passive investors or passivists (sure, it’s a made up word, but you know what I mean) explore exchange-traded funds (ETFs), most of which are passively managed for just about any asset class – U.S. stocks, bonds, foreign currency, gold, you name it. Many ETFs have ultra-low fees which gladdens passivists, who generally value a discount by nature.
Passively Managed Activists
OK, so I pointed out that most ETFs are passively managed. And yet, a lot of activists are using them to try and beat the markets. How is that possible? Well, let’s say an investor is convinced that a certain sector is ready to take off. In the not-too-distant past, that investor’s only choice was to buy a few companies in that sector. But now, that investor can pick a passive ETF that tracks the sector – buying many or most companies in it. Voila. The activist uses passive investments.
So what would you call yourself? An active investor or a passive investor? Or do you do a little of both?
Next month, we’ll look at why ETFs are considered tax efficient.
Also of Interest: ETFs
Why ETF Transparency Matters When Making Investment Decisions
To find out more about ETFs, visit Scottrade’s Knowledge Center, and learn about FocusTM Moringstar ETFs, go to www.focusshares.com.
Jack N. has been with Scottrade since 2011. He is responsible for public relations for FocusShares.