Indexing and active management are both common investing strategies. This video explains the differences between them and what they can mean for your portfolio.
Need help deciding which investing strategy is right for you? Our financial advice can help.
We spent 5 years getting to know millions of Vanguard investors and their financial choices. Our goal? To help investors learn from each other. Today we’ll talk about two popular strategies investors like you choose for their portfolios: indexing and active management. And to do that, first we’re going to meet Carl and Linda.
This is Carl. He takes a measured approach to most things he does, and he likes to go with strategies that are tried-and-true when he’s problem-solving.
This is Linda. She’s known for her more ambitious approach to pursuing goals. She’s competitive and always pushing the limits to increase her chances of success.
In the financial world, indexing and active management have a lot in common with Carl and Linda.
An index is a list of securities, usually stocks or bonds, that are grouped together because they have things in common, like price, location, or percentage of overall market value. Index products like mutual funds and exchange-traded funds are built to track the performance of one particular index. This is a methodical approach to investing, and it usually doesn’t cost fund managers much to use this strategy. This gives them the opportunity to charge you, the investor, less in management fees, so index investments can help you keep your overall costs down.
Actively managed funds and investments are different because they’re not aimed at tracking indexes—they’re aimed at outperforming them. In exchange for the extra time and effort that goes into analyzing and trying to beat the market, active fund managers tend to charge higher fees, or expense ratios, than index fund managers.
Interestingly enough, our advisors say that the choice between index and active investing is actually one of the least important factors in determining the success of your portfolio. The most important ones are around asset allocation, diversification, and controlling costs.
It’s important to note that choosing active investments could impact the cost and tax efficiency of your portfolio, because they usually come with higher price tags.
When all is said and done, your investing approach should be all about what’s right for you—but it’s always good form to watch and learn from what others are doing. That’s why we’re committed to helping you become stronger investors together.
All investing is subject to risk, including the possible loss of the money you invest.
Diversification does not ensure a profit or protect against a loss.
There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.