The Ongoing Debate: Active vs. Passive Investing

The debate between active and passive investing has been one of the most contentious topics in wealth management. Advocates of active management claim that skilled fund managers can outperform the market, while passive investors argue that markets are too efficient to beat consistently.

At Fowler Drew, our approach is entirely passive—not because of ideology, but because evidence overwhelmingly supports passive investing as the best long-term strategy. In this article, we explain why.

Understanding the Difference: Active vs. Passive Investing

• Active Investing: Fund managers select stocks and time the market to try and outperform a benchmark index. This involves higher costs and more frequent trading.
• Passive Investing: Investors track a market index (e.g., FTSE 100 or S&P 500), keeping costs low and allowing broad market returns to dictate performance.

Why Passive Investing Wins

1. The Data is Clear: Active Managers Rarely Outperform

Multiple studies have shown that most active managers fail to beat the market over time. Even the few that do tend to struggle to repeat their success consistently.

Key findings from research:

• 90% of actively managed funds underperform their benchmarks over 20 years.
• High costs and fees erode any potential outperformance.
• Short-term success is often due to luck, not skill.

2. Passive Investing Reduces Costs

Active management fees often exceed 1-2% per year, while passive index funds typically cost 0.10-0.30%. Over decades, these cost savings compound into significant financial advantages.

For example, a 1% fee difference over 30 years on a £500,000 portfolio results in:

• Active portfolio: £1.35 million
• Passive portfolio: £1.68 million
• Total difference: £330,000 (simply due to lower fees).

3. Markets Are Highly Efficient

Financial markets rapidly price in new information, making it difficult for fund managers to find mispriced stocks. Even professional investors struggle to consistently outguess the market.

4. Passive Investing Eliminates Emotional Mistakes

Active investing often leads to poor decision-making based on emotions, such as:

• Buying high (when markets are rising due to hype).
• Selling low (when markets fall and panic sets in).

By sticking to a passive, rules-based approach, investors avoid the psychological traps that destroy long-term returns.