Have the protagonists arguing the merits of active and passive funds declared a truce?
Well, not quite, but there is a growing belief that the best of both worlds is the place to be.
To Joe Public investing can be scary. And stock markets can be particularly scary because it is so difficult to second guess them.
In February last year the FTSE 100 was below 5,500 but a little over a year later it had reached 7,500 … and this was after we had voted for Brexit and Donald Trump won the US election, two events which many predicted would cause carnage.
It didn’t happen.
With the FTSE 100 still very high, some of our clients are questioning whether now is the time to be investing.
Surely a severe correction is well overdue.
My reply is that it certainly doesn’t look too attractive to buy the FTSE 100 with levels around 7,400 at present, not far off all-time highs.
But investing in a diversified, active portfolio of funds is a very different prospect when taking a medium to long-term view.
To remind you the difference between active and passive, active management is where you select a fund run by a particular manager and his portfolio construction, and hope that either he is very skilled or very lucky … or maybe both. Passive management mostly takes in index-tracker funds which track the performance of a particular index, for example the FTSE 100 or the S&P 500.
Active managers believe that through expertise, timing and pinpointing opportunities in the market, they can achieve higher returns. Their experience and forensic share analysis will tell them when to get into or out of a particular stock or bond. Successful active investment management requires being right more often than wrong.
Passive managers do not believe you can beat the market and it is far better to accept average returns. Which is why tracker funds have become so popular.
When it comes to deciding which side of the line you should be on … what does the evidence say?
Study after study down the decades has shown that only a small percentage of actively managed funds ever do better than passive ones.
So passive is best then?
Not necessarily … for two good reasons.
Once the argument used to be binary in that people were in favour of one style or the other whereas now it is commonly accepted that both have their place and a portfolio which combines both is likely to offer the best outcome.
Secondly, legendary investors from Warren Buffett to Neil Woodford do beat the market – can you back the right horse? Just so tempting.
One approach, which combines the best of active and passive, is to invest in companies that have good balance sheets and strong dividend pay-outs – not that exciting but not that risky either – while putting a proportion of your money into trying to pick the next high fliers. Being conservative with the bulk of your fund and flying by the seat of your pants with the rest. You may win big time but do not invest in the riskier stuff anymore than you can afford to lose.
Perhaps the key with either approach is not to panic.
Successful passive investors hold their nerve and ignore short-term setbacks – even sharp downturns.
Successful active investors hold back from insisting shares are dumped at the first sign of trouble, and put their trust in their portfolio managers to get it right more often than not.
As the old adage goes … you pays your money and you takes your choice.