Active versus Passive Investing Strategies

Rather than make a definitive case for either method of investment, let’s instead explore the advantages and disadvantages of each approach. In doing so, the goal is to help you make an informed decision that aligns with your unique financial needs and goals.

Active Versus Passive Investing

First things first, what’s the difference between an active investment strategy and a passive investment strategy?

 

An active investment strategy

  • Involves a professional portfolio manager using his or her insight and experience to make investment choices on your behalf
  • May have various investment styles or blend of styles

Active investment strategies will attempt to beat index returns or accomplish other goals, such as the generation of income.

A passive investment strategy

  • Seeks to match the returns of a specific index, such as the S&P 500

A passive investor is concerned with tracking an index as closely as possible.

For some, the choice between the two approaches comes down to relative cost. On the whole, passively managed index funds may have low expense ratios. Conversely, actively managed funds tend to have higher expense ratios due to the fees associated with a professional portfolio manager.

In order to justify the expense of his or her fees, a portfolio manager seeks to outperform the market, and there lies the conundrum: In a climbing market, managers may have a more difficult time outperforming the index. In turn, this could make low-cost passive investment strategies more attractive.

Advantages and Disadvantages

As mentioned previously, the intent here is not to make a definitive case for active investment strategies over passive. Rather, the idea is to explore each type so you can make an informed decision on the role these strategies might play in your portfolio. With that thought in mind, let’s look at the advantages and disadvantages of each investment strategy.

 

 

  Advantages Disadvantages
Active Investing The possibility of beating the benchmark (i.e., outperforming the market) Professional portfolio managers bring with them higher fees and operating expenses. This can reduce your return on investment.
The ability to protect against market volatility – active investment strategies may be better able to react to market fluctuations, which may help to reduce portfolio volatility over time
Portfolio managers need to target a return above the market average in order to justify their fees. This may expose you to additional risk.

 

Passive Investing Passive investment strategies tend to have lower expenses than active strategies.

Passive investment strategies will inherently underperform their benchmarks as they include various costs (albeit not as high as active investing) such as management fees, taxes and trading costs.
Passive investment strategies tend to be simpler, reducing the effort required to research individual investments.This frees the investor from having to research portfolio managers or individual investments. If a particular stock experiences a run-up in price, it also typically experiences an increase in its weight within its respective index. Simply put, investors could become so over-exposed to one high performing stock that they miss out on the top performer of tomorrow or expose themselves to more risk if this company becomes significantly overvalued.

 

Relative Performance

Active management as a whole tends to outperform passive management in tough market environments. However, in periods of strong market performance it can be hard for active managers to outperform the market, making the low fees of passive investments more attractive.

 

It’s worth noting that volatility is a normal function of the market. While the last five years have been witness to a period of growth, you can count on the fact that market volatility will recur time and again.

Making a Decision That’s Appropriate for You

When purchasing any investment, it’s important to do so with a goal or purpose in mind, while also considering the different costs and benefits inherent in it. In doing so, you may find that both active and passive investments have a place in your diversified investment portfolio, so long as they align with your financial goals, time horizon, tolerance for risk in your diversified investment portfolio and other personal factors.

  • TOPICS
    Help Keep Your Life Insurance On Track
    Ask yourself these questions every one to two years.
    Help Keep Your Life Insurance On Track
  • THOUGHT LEADERSHIP
    Investment Corner
    Key PNC thought leaders detail the impact of market activity on investment options through e-Newsletters, market commentary, videos and upcoming events.
    Investment Corner materials
  • Topics
    Retirement Assets and Rising Healthcare Costs
    What portion of your retirement assets will go toward healthcare costs? You may need to increase that amount, because Medicare may not have you entirely covered.
    - Alternate text here -
  • SOLUTION
    PNC Retirement Planning Center
    We work with those just starting to invest, those who’ve been planning and investing for some time, and those nearing or in retirement.
    PNC Total Insight
  • OPTIONS
    Retirement Accounts
    Individual Retirement Accounts (IRAs) may offer you tax advantages.
    Retirement Accounts
  • Topic
    Nearing Retirement
    PNC Investments can help you to determine an appropriate approach for utilizing your retirement assets.
    PNC Wealth Insight
  • Important Legal Disclosures and Information

    This material is meant to educate and not to provide legal, tax, accounting or investment advice. PNC Investments and its affiliates and vendors do not provide legal, tax or accounting advice.

    Important Investor Information: Brokerage and insurance products are:

    Not FDIC Insured • Not Bank Guaranteed • Not A Deposit
    Not Insured By Any Federal Government Agency • May Lose Value

    Securities products, brokerage services and managed account advisory services are offered by PNC Investments LLC, a registered broker-dealer and a registered investment adviser and member FINRA, and SIPC. Annuities and other insurance products are offered through PNC Insurance Services, LLC, a licensed insurance agency.

    View the PNC Investments Business Resiliency Planning Customer Disclosure.

    This document provides information on additional compensation that PNC Investments receives from certain mutual fund companies, 529 plan program managers and insurance companies.

    This material does not constitute an offer or solicitation in any jurisdiction where or to any person to whom it would be unauthorized or unlawful to do so.

    PNC Investments does not guarantee the performance of any investment. Investing results may vary. Investments may lose money. Diversification and asset allocation may not prevent a loss of investment.

    PNC Investments LLC, PNC Insurance Services, LLC and PNC Bank, National Association are each affiliated with The PNC Financial Services Group, Inc.

    Bank deposit products and services provided by PNC Bank, National Association. Member FDIC.