Active or passive aggression?

The range of financial investments offered by institutions can be separated into 2 groups, active and passive.

Passive funds track a particular index. The money you invest is used to buy a bundle of shares which is proportion to the index. The fund manager's only buy and sell these shares to keep the bundle proportional to the index. This gives you the market return (known as beta). And example is if you invested in a fund which tracked the NZX50. You would own 50 different stocks in proportion to the size of the companies.

Since little research is required by the fund manager and share trading is kept to a minimum, the fees are kept relatively low. Of course, your returns are restricted to the market return.

Active funds are a portfolio of shares whose composition is decided by the fund manager. The manager researches the companies and buys and sells shares based on his opinion of how share prices will change. You get a return of alpha, which is the total return minus beta.

This means you can have a higher return than the market depending on how well the manager does. However since there is more trading and research involved, the fees are usually higher.

So which are better? It depends on your preference. Personally I think passive funds are better. The fees are lower and you know what you're investing in. The higher fees in active funds usually don't justify the return. This article also has some information.


So which do you prefer?

Disclaimer: You should always consult a professional finance advisor before investing your money (just like you should always consult a doctor before starting a new exercise routine/diet). I'm not a professional, I wrote this article purely for fun.