Active vs. passive investing = Boomer vs. Millennial?
Whether passive or active investing is a better investment method is a question that comes up repeatedly in investment circles. Here, we aim to provide an overview.
What is active investing?
Active investing involves making conscious decisions. Certain securities are bought and sold at a selected time. The goal of active investing is to beat the stock market, implying high potential profits and higher risk. The most common methods are stock picking and market timing.
Stock picking is a systematic analysis to decide which stock to invest in. It analyzes, for example, the value, growth, profitability, and return characteristics of a stock, as well as macroeconomic factors that can influence a company. However, since there is no sure way to predict the price of a stock in the future, stock selection is a difficult and by no means a risk-free process.
Market timing is an investment strategy in stock market trading. Investors try to predict when the market will rise or fall. The goal of market timing is to buy and sell stocks at the right time, so-called trading.
What is passive investing?
Passive investing is not about beating the market but about betting on the market and adapting to market developments. No individual stocks are selected, and therefore no complex analysis is required. Thus, this investment option is also accessible to people who are not stock market experts.
Investors invest in the whole market using exchange-traded funds (ETFs). ETFs provide access to a broad spectrum of investment opportunities – a global diversification of the portfolio and thus a return at the market level. Just 20 years ago, this was only possible for large investors.
Passive investing requires a “buy and hold” mentality. This does not mean anticipating every move in the stock market and holding your investments for an extended period of time. Instead, when you own thousands of tiny pieces of stock, you achieve return simply by participating in the upward movement of corporate earnings over the entire stock market.
Passive investors are not guided by their emotions and ignore short-term market changes – even sharp downturns.
Conclusion: Active vs. passive investing
Which of these strategies is more profitable? You might think that professional money management trumps simple index funds. But on average, it doesn’t.
Sixty years of empirical financial market research shows that passive investments perform better as a whole. In Europe, for example, over 90% of active equity funds underperformed the index return over a ten-year period, and that’s even before costs. Only a fraction of active investors achieve higher returns than the market return. And that’s not permanent either. Even the most famous investor in the world, Warren Buffett, advises buying ETFs.
In a steady world, discontinuous jumps are coming. Even well-informed investors cannot predict the stock market flawlessly and lose investments again and again. In the long run, an index (such as the DAX or its American brother, the Dow Jones) is almost impossible to beat – this is the quintessence of financial market research over the past decades.
How do we deal with this question at UnitPlus?
Passive investing is rational in an environment without interest rates, with high inflation and long-term rising stock markets. However, passive investing also requires people to be somewhat familiar with financial market products and live with temporary losses.
UnitPlus helps people become active on the capital market in a suitable way and lets your money work effortlessly for you until you need it.
UnitPlus is aware of the advantages of passive investing and therefore invests exclusively passively.
UnitPlus invests in a diversified and sustainable portfolio.
UnitPlus suggests a monthly investment amount that you can invest according to your circumstances.