Passive and active investing are two ways to make investment returns. Since my first job in finance, I’ve always actively invested some of my funds to chase unicorns. The question is: what is the recommended split between passive and active investing?
If you are only a passive investor, you won’t be able to outperform the market (S&P 500 or your index of choice). But at least you’ll save on fees and grow with the market. You’ll also outperform people who don’t even bother investing.
If you are an active investor, you have a chance at outperforming the market. However, the track record for outperformance isn’t that great for active investors.
We know from the data that investing in passive index funds over active funds is the way to go over the long run. No rational person would keep on investing in an active fund that regularly underperforms its benchmark.
Yet, despite the logic, active equity funds still account for about 50% of the entire assets under management of all funds. Why?
The simple reason is that a minority of active equity funds do outperform their respective benchmarks. And when they do, this creates hope. We, humans, live on hope as well as a good dose of investing FOMO.
In this post, I’d like to share my thoughts on various splits between passive and active investing. I’ll also discuss which type of person is most appropriate for each of the four splits.
Your split between passive and active investing is part of your overall stock allocation.