Someone chooses the index, its rules and how it is tracked. Those are decisions, made once and then inherited by everyone who buys.

Passive investing usually follows a market index or stated set of rules, aiming to capture its return before costs. Active investing gives a manager discretion to choose holdings and position the portfolio differently in an attempt to meet its objective.

Active does not guarantee better results either; the manager can outperform or underperform, and higher research or trading costs can matter. Both approaches can range from broad and simple to narrow and complex.

So the comparison should fit the role. Ask about the benchmark, cost, diversification, tracking difference, manager process, risk and the evidence needed to keep using the approach. A portfolio can combine active and passive components without inconsistency.

Try this now

Label each fund in one portfolio as active, index-tracking or unclear. Record its benchmark, cost and intended contribution to the portfolio. Do not use last year’s winner as the only test.

Ask your advisor

  • Why is active judgment or index exposure useful in this part of the portfolio?
  • What result would count as the strategy doing its job?
  • Over what period and after which costs will it be assessed?

There is no universal winner independent of market, price, implementation and purpose.

Next: The model is standard, the reason for choosing it should not be