In our experience there are three main investment styles –
With Passive investing the idea is to buy the whole market rather than attempt to ‘cherry pick’ the future winners in that market. For example, if you were investing in the UK, you might choose to invest in a fund that mirrors all the companies in the FTSE All Share index (approximately 620 companies). Advocates of this style believe it is not possible to outperform the average return of all 620 companies after costs over time by choosing to invest in just a selection of the best companies. Passive investing typically, although not always, has relatively low costs because little research is being done to pick the future winners.
As the name implies, this style is the opposite of Passive investing. Advocates of active investing typically believe it is possible to identify and buy a portfolio of future winners. So again, assuming you are investing in the UK, the fund might hold, say, 60 of the 620 companies. Mathematically these 60 will perform better or worse than the average return of the 620. Typically, (although not always) this style has higher costs than the Passive approach most likely due to the research costs involved in analysing all the companies and deciding which ones to buy.
Evidence-Based investing sits somewhere between Passive and Active. The core approach is similar to Passive as advocates of this style believe it is not possible to consistently ‘beat the market’, and so the starting point is to buy all 620 companies.
However, the evidence element is that academic studies have shown certain sections of the market perform better than the market average over longer time periods. For example, small companies have historically performed better than the market average over long time periods. Therefore, the fund chosen might be “overweight” or buy more of the small companies. To be clear this does not involve deciding which small companies to buy (this is active management) but instead buying all the small companies in greater proportions.
At Blackdown Financial we are proud advocates of the Evidence-Based investing approach as being independent we have evaluated the three style and believe this gives our clients the best chance of a successful investment experience.
To us, this is crucial as we believe investing is about generating a return on our money so we can achieve and maintain our ideal lifestyle without fear we will run out of money or die with too much.
As David Booth (Founder and Executive Chairman of Dimensional said ‘The number of managers that can successfully pick stocks are fewer than you’d expect by chance. So, why even play that game? You don’t need to.’
This article represents the opinion of W&T Ltd trading as Blackdown financial only and is intended as information only. The content of this article should not be construed as advice or recommendation.