Why We Shouldn’t Let the Passive Investing Rise

Savings rates suck. Bonds offer little yield and investing in the stock market can be a full-time job. Who really has the time to work nine to five, get home and start pouring through annual reports? It might be for some, but for many others it’s not their idea of fun.

It’s why out sourcing your investment research or investing entirely, is an attractive alternative. When handing off your money to be managed, there are usually two roads you can go down — active or passive.

Active Investing

Active is where you give a lump of money to professional investors, with the idea that over time you will earn returns far better than bonds, real estate and even the market returns.

Passive Investing

Passive is when you simply buy an index fund or exchanged traded funds. The fees are lower and this strategy tends to outperform many active managers. And because the market has been on such a hot streak recently, many active managers have been left in the dust.

As reported by the Australian Financial Review:

‘…the benchmark S&P ASX 200 index delivered a total return of 14.1 per cent for the 12 months to June 30, but the average return from large cap retail fund managers was 13.2 per cent.

Go back over the past five years and more than 64 per cent of large cap managers failed to beat the index, while since 2007 three quarters, or 75 per cent, of all fund managers couldn’t match the gains made by the major index.

Because investors follow returns, passive investing has become more popular now than ever. The Sydney Morning Herald writes:

‘…about 20 per cent of Australian-domiciled local and global equity fund assets are currently in passive strategies.

And people like Graham Tuckwell, chairman and owner of ETF Securities, believe that this will continue to grow rapidly. He told The Australian that funds managed by active managers could fall below 20% in the future.

The End Result of Passive Investing

This passive trend has caused many active managers to slash fees, in the hope that funds won’t leave for a cheaper higher-returning option. But if passive investing continues to grow, it will indiscriminately bid up the biggest stocks on the market, making some of the most expense stocks even more so.

The end result is a market which is extremely overvalued and could be on the verge of collapse.

But this might not be the only risk on the horizon. If you want to protect your capital and make sure you make it through 2017, click here.


Härje Ronngard,

Junior Analyst, Markets & Money

Harje Ronngard is a Junior Analyst at Markets and Money. With an academic background in finance and investments, Harje knows how simple, yet difficult investing can be. He has worked with a range of assets classes, from futures to equities. But he’s found his niche in equity valuation. It’s not good enough to be right on average when it comes to investing. The market is volatile and it only takes one bad day to ruin your portfolio. You don’t want to end up like the six foot man that drowned in the river that was five foot deep on average. It’s why Harje is constantly reminding investors of their downside risk here at Markets and Money. He does so by simply asking just two questions.  What is it worth? And how much does it cost? These two questions alone open up a world of investment opportunities which Harje shares with Markets and Money readers. Right now Harje is focused on managing research and investments over at the Legacy Portfolio. An investment publication designed to significantly grow investor’s wealth over time with deeply undervalued businesses. Harje also contributes his insights in Total Income, headed by income specialist Matt Hibbard. Harje loves cash-rich businesses, so he feels right at home amongst Matt’s high yielding income plays.

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