Active vs. Passive Investing
In the previous blog post I mentioned that I was going to go with two different brokers for my different goals of active and passive investing.
Active investing is more speculative in the sense that it will require some more research into specific companies and sometimes comes with the goal of attempting to beat the market. For example, buying individual company stocks.
Passive investing on the other hand adopts a more long-term approach and mindset to investment consists of purchasing index or other mutual funds. These funds are predetermined list of stocks which either track an index which tracks the whole market or sector, or stocks hand-picked by a fund manager. These are passive because it reduces the need for speculative decisions for the investor, and these funds are predominantly designed for long-term holding.
Why did I choose two different brokers?
Different brokers are chosen for the different styles of investing due to fees and accessibility of the investment products.
Vanguard for passive investing – My plan is to add money to my long-term fund on a relatively frequent basis. There are ideal criteria which I wish to see in a broker for this plan of investing: Since this is a long-term investment strategy, the choice of broker will ultimately have an enormous impact on your long term nest-egg. Just as the power of compound interest can work in your favour in savings accounts, the power of compounding can work negatively for you in fees. This is why I have chosen Vanguard and will choose to invest in an index fund tracking the market, as the fees will be significantly lower than an actively managed fund, and investing an index tracking the market (such as VAS tracking the AS300 – top 300 companies in Australia) offers for you diversification which is a core principle in investing.
Commsec for active investing – Vanguard also does offer the opportunity to purchase individual stocks, however their fees are higher than that offered by Commsec. This sorta makes sense, since Vanguard is good for its index funds and that is their specialty and what they are predominantly known for.
