The argument for using a passive investment strategy compared to an active strategy applies to all ages, not just someone in their 40’s. But, someone in their 40’s might just be a bit more open to considering a passive strategy given that they may be a bit older, wiser and looking to simplify decision-making activities in their lives.
The number one reason an investor should consider a passive investment strategy is that it is extremely cost-effective. Investment fees can come in a variety of forms, but the simple comparison between the fees paid for passive investment management and active investment management demonstrates a very clear advantage for passive options. It is expensive to hire a group of intelligent investment professionals whose job is to consistently outsmart everyone else in the markets, and investors are on the hook to pay for this whether the strategy is successful or not. Virtually all academic evidence supports the fact that nobody can consistently be smarter than “the market”. Passive investment options are not free, and neither is quality investment advice, but by adopting a passive investment strategy, you can reduce your annual investment expenses anywhere from 30% to 90%! Compound that over an investing lifetime, and you can increase your wealth significantly with one simple decision.
A second important reason to adopt a passive investment strategy is that it instills discipline in investing. Whether you are selecting your own investments, or delegating that to a professional, eliminating or simplifying the decision of “what” to buy saves you a tremendous amount of time (and stress!) and helps you avoid making mistakes. Creating a robust financial plan, sticking to the plan, and periodically checking up on the progress of your plan is a far more sound way to build wealth than trying to discover the next Amazon.
Lastly, the supply of passive investing products has exploded over the past few years, so there is now something available for every type of investor. The overwhelming evidence that passive investing generates greater wealth than comparable active investment strategies is catching on, so we have seen the emergence of many new companies driving costs down even further and improving innovation to cater to a wider range of investor preferences. Looking back just ten years ago, there were only 49 Exchange Traded Funds (ETFs – widely considered to be the primary passive investment product option) available in Canada. Today that number is over 650. So regardless of any particular investment preference or need, it is likely that there are passive investment options available to you to help you achieve your financial objectives.
Written by James Gauthier, Chief Investment Officer at Justwealth