If you want to invest but are not sure about how to pick stocks, passive investing may be for you. But what are your options to invest passively? Read on to find out more.
In the investing world, a common distinction is made between active investing and passive investing. Simply put, active investing seeks to beat the market (by capturing ‘alpha’) while passive investing seeks to follow the market (by buying market ‘beta’).
Passive investing using Goal based investing.
Several studies have concluded that most traditional fund managers (i.e those who try and beat the market) cannot provide consistent active returns for several reasons. Some of the reasons are a lack of skill (Jensen, 1969) and that active management leads to greater taxation (Arnott & Jeffrey, 1993). As such, they cannot justify the fees that they charge.
Crea8 overcomes this by offering Factor based investing at only 17% of the fees paid to traditional fund managers.
Because of the underperformance of active fund managers or the lack of consistent outperformance, investors have resorted to owning the market by buying index funds instead of trying to beat the market.
In August 2019, data from Morningstar showed that there were more passive investors than active investors – assets in index-tracking U.S. equity funds are $4.27 trillion vs. $4.25 trillion run by stock-pickers.
There are a few vehicles that can be used for passive investments:
ETFs have been the instrument of choice for many investors. It took nearly 20 years for the first ETF (launched in 1993) to reach $1 trn in assets. However, going from $3trn to $4trn took only 2 years (2017 to 2019).
There are several reasons why ETFs are preferred:
Exchange traded: Like stocks, ETFs trade on exchanges. This means that investors can place market orders, such as stop-loss orders and limit orders to automatically sell their ETF when it reaches a certain price either to cut loss or to take profits.
Crea8’s Goal based investing service provides you with a cost-efficient avenue to realise your financial goals sooner than investing using unit trusts. Besides, Crea8 provides you with personalised and optimised investment portfolios.
The wide range of ETFs in our investment universe gives assurance that the investment plans we provide you are diverse and capable of withstanding market stress and consistent with the theme.
Investors today have access to various instruments to invest passively. Despite this, we believe that ETFs offer the best option for investors looking for passive investment exposure.
If you want to know more about ETFs, check out this article that takes an inside look at ETFs.
For further insight including how we make use of ETFs for our investment services, check out our white papers.
Jensen, M., ‘Risk, The Pricing of Capital Assets, and the Evaluation of Investment Portfolios’, The Journal of Business, 1969, vol. 42, issue 2, pp 167-247 https://econpapers.repec.org/article/ucpjnlbus/v_3a42_3ay_3a1969_3ai_3a2_3ap_3a167-247.htm
Arnott, R.D. and Jeffrey, R.H., ‘Is Your Alpha Big Enough To Cover Its Taxes?’, Journal of Portfolio Management, Vol. 2, 1993, pp 1-14 https://www.evidenceinvestor.com/evidence/is-your-alpha-big-enough-to-cover-its-taxes/is-your-alpha-big-enough-to-cover-its-taxes-robert-h-jeffrey-robert-d-arnott-spring-1993/