The Ultimate Question: Passive Or Active Investment?

Is it really worth the trouble? Statistics have shown that most professional fund managers tend to underperform the market.

For investors in Singapore, the benchmark to beat would be The Straits Times Index (SGX: ^STI). So if even professionals do not seem to be able to beat a passive benchmark, why should any of us even bother? Should we all give up and just employ a passive investing strategy such as buying ETFs like the SPDR® STI ETF (SGX: ES3) and the NIKKO AM Singapore STI ETF (SGX: G3B)? Active investing on the other hand, involves us managing our own portfolios, choosing the stocks to buy and sell.

Let us look into the pros and cons of passive and active investing. One might be more suited to you than the other.

You will always underperform the market with ETF

If you were to invest in a passive ETF tracking the index, you will underperform the market every single year. This is mainly due to the transactional and management fees involved in buying the ETF. Furthermore, not all ETF are safe and investors should be research on what they are really buying even if it is a passive ETF that merely tracks the performance of a benchmark.

So, is it better to outperform the market sometimes or constantly lag the market? If you do your homework and manage your own investments, there is a chance for you to outperform the market. This allows you to compound your money at a much faster rate.

Active investing seems to be the winner in this round. Active 1, Passive 0.

Time, the most precious commodity

Investors need to understand that actively managing your money require a lot of time and effort. You need to be comfortable with the investing decision you are making. In order to get a good night’s sleep, one has to spend time understanding the underlying businesses that one are investing in. Reading the 10-year annual reports of Keppel Corporation Limited (SGX: BN4) might not be the idea of fun for most people.

Therefore, for investors who believe that their time is more important than beating the market, passive investing is the way to go. Active 0, Passive 1.

Foolish Summary

There are both pros and cons to passive and active investing. The most important thing is investors should be comfortable with whichever strategy you end up choosing. Whether you invest actively or passively, one thing is for sure, investing over the long-term will give you the best odds for success. If you would like to continue to learn more about how investing can help your GROW your wealth, sign up here for a FREE subscription to The Motley Fool’s weekly investing newsletter, Take Stock Singapore

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim owns Keppel Corporation Limited