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Smooth sailing or adventuring solo: the passive v active debate

Passive travel may equal safe passage - but you could miss the active highlight of a lifetime

Half-term holidays this week for those with youngsters still at school got me thinking about the passive v active management debate I touched on in my previous blog.

I still think one of the main challenges the industry faces is being able to explain to most people what the difference is between the two. On the whole, this isn’t done particularly well. Even the two terms “passive” and “active” aren’t especially descriptive.

Interviewing Tom Becket the other week (Punter Southall Wealth’s chief investment officer) - gave me the germ of this latest blog. Tom carries out his own research on the ground. This means he travels to Japan or America or anywhere he is considering allocating assets on behalf of clients to find out for himself the potential returns and risks.

This is worth spelling out as I think some (wrongly) have a Hollywood view of some kind of mathematical genius in front of number-scrolling screens and surrounded by spreadsheets, building up to a eureka moment.

When you set Tom’s deliberately pavement-level, shoe-leather approach against the apparent dominance of passive funds, which just mechanically track the main financial indices, it does offer a different perspective.

And given it involves travel, I thought a tourism analogy was fitting.

The cruise ship industry is increasingly influential in the global tourism economy (worth £134bn in 2017). Some 30 million went all-aboard last year, visiting locations ranging from Amsterdam to Miami and the Galapagos to Barbados.

And why not? You pay for luxury and indulgence while marvelling at some of the most sought-after destinations on earth.

These ocean-going leviathans now criss-cross a well-worn route between continents as the market continues to grow and everyone gets what they want. Cruise companies and tourist attractions bring in revenue and customers tick off their “to-do” list.

But what are they missing? Surely we’ve all felt the desire to avoid the holiday crowds and disappear into an undiscovered neighbourhood in Venice or Bangkok? In so doing, we could find a fantastic meal at a bargain price in the cafe of our dreams and earn an enduring memory because we weren’t on a schedule designed for the masses.

Missing out on a gem

However, if you were being herded around the city centre with a deadline to get back on board, how much time could you really devote to unearthing a jewel that may define your trip?

Rather inelegantly, that’s how I would characterise passive investing. The numbers involved and the lack of flexibility therein means that you cannot devote the time to seek out something that would offer a different dimension of value altogether. Your pathway has been predetermined, with little room for manoeuvre.

It also comes back to my point that even to invest passively means making an active decision: you book the cruise.

But even if we do style the debate as “passive v active”, in truth, there are many variations to get the best of both worlds. And in all cases, the risk of not getting back what you invested applies.

Active exploring

If you put together your own flights, itinerary and duration, you’ll have much more flexibility and, yes, adventure. And who knows what you may discover what everyone else on well-worn cruise or package holiday paths has failed to spot?

And I should point out that this also raises the element of risk. If you’re going it alone, a guide may be a wise addition in an unfamiliar landscape, if you’re to avoid being caught up in a civil war or quarantined by a new super-virus.

Which brings me all the way home to my original point. There is room for both approaches in the wider investment world.

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Even if we do style the debate as “passive v active”, in truth, there are many variations to get the best of both worlds.

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After 40 years of experience in the pensions world, I'm sharing my insights.