Much has been said about the pros and cons of active vs passive stock investing. For those of us who are not clear still active investing refers to picking specific stocks to invest in. This stock picking can be done by yourself or by a fund manager when you buy a specific unit trust or mutual fund. Passive investing on the other hand, refers to buying the entire index without trying to decide if a specific stock is better than another.
Needless to say, passive investing costs much less since there are little transactional fees and fund management fees. The most common instruments for passive investing is via ETFs. ETFs also help to achieve diversification of the portfolio at minimal costs. It also requires less oversight and analysis on the investors part. Frequently the only knowhow required is to have discipline to dollar cost average and to rebalance your portfolio quarterly or every 2 quarters.
Of course, investing in index ETFs by definition means you cannot beat the market and can only match the market. So how has the passive investor been doing this year? Let’s check out the returns below. Note these are index rates, the ETF returns will need to reduced by about 0.2% to 0.3%.
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What does the above mean? First, if your equity returns are above the comparable benchmark, you may want to consider just passive investing. Second, geographical allocation matters. Even passive investors need to pick the right geography. However, some just invest in all geographies to get average return or they invest in the MSCI World which did 3.3% to date.
So did your equity portfolio beat the passive index so far?
To check your returns, Dr Wealth provides a bench marking tool for you to easily calculate your returns on a time weighted return basis to compare to the returns from the benchmark. To get started, click on the link below.