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Choosing between an active or passive investment strategy is an important debate within the investor community.
In terms of active funds management, it is to take full advantage of short-term price fluctuations and expect a big return. It requires much deeper analysis, the skill and the ability to understand when to select a specific bond, stock or any instrument, but it gives you more flexibility. An active investment requires confidence that anyone investing the portfolio will know exactly the appropriate time to buy or sell. An active fund is great when the analyst is right and brings high returns but terrible when the advice is wrong. The risk is high and unknown. Another thing, the fees and costs of investing in active funds are more expensive than passive funds and can kill returns.
Different analysis tends to show the passive investments can offer to the investors lower fees than active fund management. It shows greater transparency and the risk is greatly diminished, for example a long-term investor will not have to wake up at the opening bell every day and his stress level will remain at a minimum. Another important aspect of the long-term investing is that anyone can do it and a majority of investors will get a better return just in investing in passive funds.
|Passive Management||Key Feature||Active Management|
|Generally lower than active management||Investment Management Fees||Generally higher than passive management|
|Generally tax efficient||Tax Efeciency||Depends on the investment manager|
|No||Potential for Above-Market Returns||Yes|
|Yes, after incorporating fees||Potential for Below-Market Returns||Yes|
|No||Potential for Down-Market Protection||Yes|
|Seeks to replicate the performance of the benchmark||Decision-Making Process||Seeks to capitalize on market conditions|
To really understand the topic, it is fundamental to adopt another subject which literally changes the behaviors of traders, such as the influence of the 2008 crisis on the popularity of passive investment.
As a result of the financial 2008 crisis, there is a renewed interest in an essential dimension of financial activities and we can see it! The investors have started to trust and invest significantly more in the passive and long-term investments. The popularity of ETFs and the emergence of Robo-Advisors are totally involved in this renewal.
This subject tends to show that, after the crisis, retail investors and passive investment have rose significantly this taking into account the lack of knowledge and experience of some retail clients. Therefore, Robo-Advisors have a comparative advantage over traditional financial advice, which must generate sufficient outperformance to justify its cost. Thus, even if its use seems to be primarily motivated by technical reasons, the passive funds management adopted by Robo-Advisors constitutes an innovation in the model of passive investments funds.
The ETFs take a passive investment approach. Therefore, the expenses are considerably less to run. ETFs are diversified and decrease the risk of single-security price changes. Thanks to their low cost and efficiency combined the Robo-Advisors, they are really the keys and the will of such investment instruments.
Smart Beta BoomU.S. ETF assets hit record $639 billion
This topic finally and undoubtedly shows us the major reasons for the growing and rapid popularity of passive and long-term investment strategies.