There are many arguments both for and against active and passive investing.
Active investment funds employ a fund manager to buy and sell shares and make a return on peoples’ money. Their aim is to achieve a better return than their fellow fund managers and the market index. However a typical actively managed fund will cost around 1.60-1.80% per annum in charges.
Passive investment funds, using computerised processes, will aim to track the performance of a given index e.g. the FTSE 100 – nothing more, nothing less. However a passively managed fund on average will cost around 0.40% per annum, some as low as 0.15%.
The choice between the two usually comes down to a very simple decision: do I want someone looking after my money, trying to beat the market and charging more; or, do I want to settle for what the index returns and spend less in charges.
I think this choice is similar to the dilemma of whether to eat in or go out. You know eating in will be cheaper, more reliable, and there’s none of the hassle of choosing where to go. Eating out will be more expensive, there are lots of choices and therefore lots of opportunity to get it wrong, but you may just enjoy a great experience.
Ultimately it comes down to personal choice. Some people are happy to settle for the cheaper, healthier, more stable long term option. Others prefer to pay for a potentially better experience.
Of course there is nothing to say that you have to be a fan of one or the other. Why not both?