Understanding your investment persona

Is being hands-on better than hands-off?

As a hands-on investor, your view is that having your hands on the investment tiller at all times means you can respond quickly to situations and make better, more informed choices.

Or, as a hands-off investor, you can probably take comfort in the fact that you don’t get caught up in the day-to-day market noise that often drives other investors into making impetuous investment decisions.

But, believe it or not, there is a happy medium between the two, and the sooner you realise that, the better off you’ll be as an investor over the long term.

Even if you do consider yourself a hands-off, passive-style investor, the reality is that there is no such thing as passive investing.

That’s because every decision to invest capital always involves making an active choice. You do that right at the beginning, by deciding to invest in a particular asset or product in the first place. While you may take a “set and forget” approach to holding that asset afterwards, there’s no doubt that at various stages you will take an interest in how it’s performing.

You also make active decisions along the way, even if that’s to continue holding a particular asset, and you make an active choice when deciding to sell.
 

What investment products are best?

Perhaps a better question to ask yourself is whether you should focus on investment products where fund managers play a minimal role, or products where fund managers make active investment decisions by buying and selling shares to achieve better long-term returns?

Here, the decision largely comes down to investing in products that are designed to match the market’s performance, minus management fees, or products that are run by investment managers who are focused on outperforming the market, after fees.

And the best response to that is, rather than thinking one way or the other, it’s best to do both.

Your weighting to one investment strategy over the other should be based on your financial objectives (including your investment time frame and your broader financial needs) and your risk appetite.
 

A blended approach

What’s most important to recognise is that a blended investment approach is really achieving the best of both worlds.

For example, using a blend of exchange-traded funds that track a region or asset class are a great way to achieve broad portfolio diversification. Your returns will largely follow the markets or sectors you are invested into.

Likewise, using actively managed funds that have a portfolio of hand-selected stocks based around a specific strategy are also a solid way of gaining broad exposures with a view to achieving stronger returns than the broader market.

Your returns will be determined by the performance of the stocks chosen by the investment team overseeing the products you have selected.

There is no right or wrong way. The most sensible approach is to have a foot in both camps. In other words, taking a holistic approach to constructing your investment portfolio – using passive and active strategies that cut across different asset class boundaries – will provide durable long-term returns based around your personal objectives.

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Tony Kaye is the Editor of InvestSMART Group (AFSL 282288). This article contains general investment advice only. It has been prepared without having regarded to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. The article was originally published on 17 September 2018.