When it comes to investing, perhaps one of the first questions we need to answer is whether we are going to follow an active or passive strategy. The prime example of a passive approach is to buy an index fund that follows one of the major indices such as the S&P 500. Whenever an index changes its constituents, the index funds that follows it automatically switches up their holdings by selling the stock that’s leaving and buying the stock that’s becoming part of the index.
Active investing, as its name implies, takes a hands-on approach and requires that someone act in the role of portfolio manager. The goal of active money management is to beat the stock market’s average returns. Otherwise, it would be more cost-effective to invest in an index fund. It involves deeper analysis and greater expertise.
AAII Weekly Survey Question
To see whether our readers prefer passive or active strategies, we are our readers this question:
What percentage of the stock (equity) portion of your investment portfolio would you classify as passive (index funds or index ETFs) as opposed to active (individual stocks or actively managed non-indexed funds or ETFs)?
Here are the results:
In all, 1,859 readers responded to our weekly survey.
The results were what I was expecting: our readers prefer a more hands-on approach to investing, which means they tend to invest more in individual stocks that index funds. In this survey, 17% of readers do not have any passive equity investments as part of the equity portion of their portfolio. I was a bit surprised to see that three-quarters of respondents (76% in all) are worried to some extent about political risk affecting U.S. markets in the coming months.One-third (33%) are either worried or very worried while 43% are somewhat worried.
Only 14% of respondents have more than 75% of their equity investments in passive investments such as index funds or index ETFs.I was a bit surprised to see that three-quarters of respondents (76% in all) are worried to some extent about political risk affecting U.S. markets in the coming months.One-third (33%) are either worried or very worried while 43% are somewhat worried.
A majority–54%–have no more than 50% of their equity investments in passive investments.
Weekly Special Question
Even though it appears that most of our readers prefer active management over passive, there are still those that shy away from active investing, especially individual stocks. To see what barriers our readers face when it comes to investing in individual stocks, we posed this special question:
If you do not invest in individual stocks, what are your primary reasons for not investing in them?
In all, 145 readers responded to this question.
For most of those responding, the time it takes to research individual stocks is the primary reason why they don’t.
Another large group of respondents said they merely prefer index funds to investing in individual stocks.
The third largest cluster of responses centered around the fact they readers see investing in individual stocks as being too risky or volatile.
Some other themes that come from the responses include:
- lacking the knowledge or expertise to invest in individual stocks
- too old
- funds offer greater diversification over stocks
- lack of trust in the information provided by individual companies
- investing in individual stocks it too expensive
Here is a sampling of the responses:
- “I tried investing in individual stocks and found it totally frustrating. Something else in the industry always seemed to do better.”
- “Beating the market is demonstrably difficult, even for pros.”
- “Cannot possibly compete with the pros in getting information about individual stocks.”
- “I am not qualified to evaluate the risk premium of an individual stock. It would take too much of my time to do so.”
- “I don’t have the time or technical knowledge to properly research individual stocks.”
- “I tried it [investing in stocks] and found that I did not have the discipline.”
- “Too much risk [investin in individual stocks].”
Everybody has an opinion! Why not give us yours? Participate in our weekly member poll, updated every Monday, and see the results online at http://www.aaii.com/memberquestion.