Does your investment approach still reflect your goals, time horizon, attitude to risk, and wider financial plans? Do you prefer active or passive investing? Long-term investing shouldn’t rely on labels, prediction, intuition or constant change. We look at how an evidence-based approach can help you achieve better long-term investment outcomes.
The active vs passive investing debate
Investors can get stuck on labels such as active vs passive, but this can often distract them from what actually matters. However, what really drives long-term results is costs, diversification, discipline, and time. Whether you’re an active or passive investor, there are various behavioural risks of reacting to headlines or recent performance.
We have summarised the different approaches to investing below:
What is active investing?
An ‘active’ investor will try to outperform the financial markets by selecting investments and changing exposures over time. Although some active managers occasionally outperform, various independent studies show that (after costs), the majority of active funds do not beat benchmarks over the long term. Therefore, for most investors, trying to consistently identify future investment ‘winners’ in advance is difficult.
What is passive investing (index tracking)?
An index or ‘passive’ investor aims to capture the return of a chosen market – for example, global shares. Typically, they use low-cost, broadly diversified funds instead of trying to pick investment winners.
Most index funds are weighted by market value, which means that larger companies make up a larger share of the index. Although this approach is simple and efficient, it can lead to a greater concentration in the largest companies and sectors during certain market conditions.
Evidence-based (systematic) investing
Evidence-based investing builds on the strengths of both active and passive index investing. This approach involves diversification, transparency and low costs, while using long-established research to improve how diversification is achieved and how risk is managed.
In practice, an evidence-based investing approach could include the use of rules-based funds and indices. These might systematically tilt towards broad characteristics of companies (sometimes called “factors”), such as profitability/quality, momentum, or lower volatility. But this is without the reliance on stock picking or short-term market forecasts.
At Balance: Wealth Planning, we believe that an evidence-based, diversified approach is suitable for most long-term investors. Our aim isn’t to “beat the market this year”, but to follow a repeatable, well-governed process designed to support longer-term financial goals. This disciplined process recognises that investing risks and returns will vary over time.
Balance Wealth investment philosophy
We can’t control market returns. However, we can control the things that can reliably improve long-term outcomes: costs, diversification, discipline, and alignment to your goals.
At Balance: Wealth Planning, we believe investing should be structured, evidence-led, and designed to support the life you want to live.
Our in-house portfolios follow an evidence-based (systematic) investment philosophy. Where appropriate, different fund structures may be used, but always within a clear, evidence-based framework, with risk, cost and complexity carefully controlled.
In summary, we do the following:
- Make investment decisions that are grounded in long-term evidence and robust research.
- Keep costs low and avoid unnecessary turnover.
- Prioritise broad diversification and transparent, mainstream fund structures.
- Use a strategic, long-term asset allocation, and we rebalance in a disciplined way.
- Avoid reacting to short-term news, and we never attempt to time the markets.
- Avoid highly complex, opaque, or speculative strategies that are difficult to explain and govern.
We don’t select funds purely because they have performed well recently. Also, we don’t carry out frequent tactical changes in response to forecasts.
Financial Adviser, Nottingham
When it comes to the debate on active vs passive investing, your focus shouldn’t be on these labels, but on process, governance and discipline. Instead of stock-picking, forecasts or short-term views, a structured, evidence-based investment philosophy will help you support the life you want to live.
At Balance: Wealth Planning, our evidence-based investing approach draws from decades of academic research, diversification and disciplined portfolio construction. Although passive funds still feature heavily in our portfolios, our evidence-based approach is our overarching framework for investing. Our financial planning team work closely with our clients to match their investment strategies to their goals, time horizon, risk levels, and wider financial plans.
If you need investment advice, get in touch with our financial planners.
Sources:
(Balance: Wealth investing websites/pages/supplied information)
