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Investors today face a wide range of choices when building long-term wealth, with one of the most fundamental decisions whether to invest actively or passively.
While both approaches aim to grow capital over time, they differ meaningfully in philosophy, implementation and responsiveness to changing market conditions.
Understanding these differences is essential – not only when selecting the most appropriate strategy for you, but also in appreciating how active and passive approaches can work together within a well-constructed portfolio.
Active investing relies on the expertise of professional fund managers who carefully research and select investments with the aim of delivering returns above a specific market benchmark.
Managers assess individual companies by looking at factors such as how competitive they are, the quality of their leadership, future growth opportunities, and wider economic and political trends.
Their goal is to invest in companies that appear attractively valued and have strong long-term potential, while reducing or exiting positions where prospects are weakening.
One of the main advantages of active investing is its flexibility, particularly during periods of market uncertainty.
Active managers can adjust portfolios by reducing exposure to higher-risk areas, increasing diversification, or holding cash temporarily to help protect capital when markets are under pressure.
That said, active investing also comes with considerations.
Active funds typically charge higher fees to cover the cost of research and ongoing management, which can reduce returns if a manager does not outperform.
Performance also depends on the manager’s skill and judgement, meaning results can vary over time.
Passive investing takes a different approach, aiming to match the performance of a market index – such as the FTSE 100 – rather than outperform it.
Passive funds do this by holding the same companies, in the same proportions, as the index they track – such as the FTSE 100 or S&P 500.
Rather than trying to identify individual winners, the focus is on capturing the overall return of the market.
One of the key benefits of passive investing is its low cost.
Because passive funds require less day-to-day decision-making and research, fees are typically lower than those of active funds.
Over long periods, these cost savings can make a meaningful difference to overall returns.
Passive investing also offers simplicity and transparency, as investors can clearly see which markets they are invested in and how their portfolios are constructed.
However, passive investing also has limitations.
Passive funds do not adjust in response to changing market conditions.
When markets fall, passive strategies will reflect those declines and must rely on a subsequent recovery.
As a result, passive investing is generally best suited to investors with a long-term outlook who are comfortable riding out periods of market volatility.
During periods of steady economic growth and rising markets, passive investing can be a very effective approach, allowing investors to benefit from broad market gains in a simple and cost-efficient way.
Lower fees also help support returns over the long term.
Looking ahead, however, the investment environment appears more challenging.
Increased geopolitical uncertainty, changes in monetary policy, uneven performance across sectors and higher market volatility mean returns may be less consistent.
In these conditions, the gap between stronger and weaker companies often widens, creating both risks and opportunities.
Historically, this type of environment has tended to favour active management, where careful selection and flexibility can add value.
For many investors, the higher costs associated with active investing, along with the risk that a manager may not consistently add value, make a fully active approach less appealing.
As a result, rather than choosing between active and passive investing, many investors opt for a blended approach, combining elements of both.
One way this can be achieved is by using active asset allocation alongside a core passive portfolio – an approach adopted within the Fairstone Pure Passive MPS range.
Passive funds are tied closely to index structures and cannot adjust when certain regions, sectors or asset classes become overvalued or overly concentrated.
Active asset allocation provides the flexibility to rebalance portfolios over time – tilting towards more attractively valued areas, introducing defensive assets such as bonds or alternatives, and managing risk as market conditions change.
Similarly, blending active and passive funds – the approach taken within the Fairstone Nova MPS range – allows investors to benefit from low-cost market exposure while selectively allocating to active strategies in areas where skill, flexibility and insight have the greatest potential to add value.
Ultimately, both active and passive investing offer clear benefits, and neither approach is right in every situation.
The most suitable option depends on your individual goals, investment timeframe, tolerance for risk and how closely you wish to engage with your investments.
Passive strategies can be particularly effective during periods of steady economic growth, providing broad market exposure in a simple and cost-efficient way.
Active management, meanwhile, may add value in more uncertain or volatile environments, where flexibility and careful investment selection become increasingly important.
For many investors, a blended approach offers the most balanced solution—combining the efficiency of passive investing with the adaptability and insight of active management.
By using both approaches together, portfolios can remain cost-effective while retaining the flexibility to respond to changing market conditions.
Whichever approach is taken, it is important to remember that markets will rise and fall over time.
Maintaining patience, diversification and a disciplined long-term perspective remains key to achieving successful investment outcomes.
For expert advice on investment approaches and which could work best for you, contact one of our advisers today.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.
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The main difference between active and passive investing is how investments are managed.
Active investing involves professional fund managers selecting individual investments with the aim of outperforming a market benchmark.
Passive investing aims to match the performance of a market index by holding the same investments in the same proportions, with no attempt to outperform the market.
Neither active nor passive investing is universally better.
Passive investing can be effective during periods of steady market growth due to its low cost and broad market exposure.
Active investing may add value during more volatile or uncertain market conditions, where flexibility and careful investment selection can help manage risk and identify opportunities.
Passive investing typically costs less because passive funds do not require ongoing research, stock selection or frequent trading.
By simply tracking an index, passive funds have lower operating costs, which are reflected in lower fees for investors.
Yes, it is possible to lose money with passive investing.
Passive funds fully reflect market movements, meaning when markets fall, the value of the investment will also decline.
Passive investing is therefore best suited to long-term investors who are comfortable with short-term market volatility.
No, active investing does not always outperform the market.
While some active managers can add value, especially in certain market conditions, performance depends on the manager’s skill and judgement.
Higher fees also mean active managers must outperform by a sufficient margin to deliver better net returns than passive funds.
For many investors, a blended approach can be beneficial.
Combining active and passive investing allows investors to benefit from low-cost market exposure while selectively using active strategies in areas where flexibility and expertise may add value.
This approach can help balance cost efficiency with risk management.
A blended portfolio may suit investors who want long-term growth, cost efficiency and the ability to adapt to changing market conditions.
It is often appropriate for investors who prefer a diversified approach without relying entirely on either active or passive investing.
Choosing between active, passive or blended investing depends on your financial goals, time horizon, tolerance for risk and personal preferences.
Speaking with a financial adviser can help determine the most suitable strategy and ensure your investments remain aligned with your long-term objectives.
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Savings & investment
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