Active, passive or systematic investing?

There is no such thing as truly passive investing — even buying an index fund involves decisions: which index, how much, when to add, when to withdraw, and whether to hold on in a crash. The real question is how you make those decisions.

Active: judgement

An active investor or fund manager picks stocks, sectors or timing based on research and judgement.

• Pro: can outperform in skilled hands; flexible.
• Con: expensive, hard to verify skill in advance, and most active funds trail their index after costs over long periods.

Passive: own the market

A passive investor buys a broad index and holds it.

• Pro: cheap, simple, captures the market return, no need to be right about anything.
• Con: you take every crash in full — 50% or more in the worst bear markets — and you need the nerve to hold on.

Systematic: rules

A systematic investor follows written rules that are tested on history and applied mechanically — for example a trend-following rule that holds a market in an uptrend and steps aside in a downtrend.

• Pro: decisions are consistent and measurable; the rules can limit the deepest losses; no forecasts needed.
• Con: rules lag at turning points, can whipsaw in sideways markets and will trail buy & hold in strong, uninterrupted bull markets.

Which one fits you?

• Little time, strong nerves: passive, with regular monthly investing.
• Want to control the big losses without making forecasts: systematic — the approach behind our Research Terminal.
• Enjoy research and accept the risk of being wrong: a small active portion on top of a passive or systematic core.

Many investors combine them: a passive or systematic core, and a small satellite for their own ideas.

Related: trend following explained · why you need a repeatable process

By Dr. Harry Hamann · 5 min read