There has been an on and off debate about active and passive management for many years.
The discovery that many fund managers did not manage to beat the share index for the country where they were invested, led to the creation of funds that replicated or mimicked the index.
They give you the capital gains and income of your share of the totality of shares in a given market, minus a small amount for the costs of the fund.
This has led some to conclude you should buy the passive, to avoid the danger that your chosen investment manager underperforms the index.
It means surrendering the hope that they will do better than the index.
The debate about whether someone should be an active or passive investor is a false distinction. It may make good copy for investment articles in papers and magazines, but it offers little insight into the decisions savers and investors have to make.
In reality there is no such thing as a pure passive investor, nor are many active investors active about all elements of their investments.
The more prosaic reality is most investors are partly active and partly passive in their portfolios.
There is no such thing as a purely passive investment. If you want to invest by matching market indices, you first have to make some very active decisions about your portfolio.
Which asset classes do you want to include? Do you want some in shares, some in bonds and some in property?
When you decide on shares, do you want that to be the world market, or your national market, or some choice of individual geographical markets?
If you want some investment in bonds, do you choose government or company loans? Which country or countries do you want in your portfolio?
If you like property do you have enough money to buy individual properties, or are we talking about a property fund or a portfolio of property company shares?
At Charles Stanley, we always point out that you do need to decide on an asset allocation, which is the most important decision you will make that has an impact on your performance.
Some think once decided, you should live with it for the long term. But it is usually better to keep it under review in case there is a major change in your needs or market behaviours that would warrant altering it.
Just deciding your asset allocation still requires active choices to implement it, even when deciding on low cost passive funds.
Say your chosen asset allocation includes US shares. Do you want to match the S&P 500 Index, the Dow Jones, or the Nasdaq?
Do you want an index that includes all listed companies, just the main ones or just the smaller ones? These are all available as index funds, and will deliver different results.
If you have made a choice, do you want to stay with it whatever happens, or do you want to try to make changes if fashions and perceptions about the different US markets change?
The nearest you can get to a purely passive portfolio would be to set up say a risky portfolio that simply copied the world index, or a balanced fund that had half invested in a global share index and half in a global bond index.
Your investments would be managed and changed by the index manager, taking new companies into the index as they qualified, expelling failures from the index when they crashed, and adding to positions when companies expanded their share base.
Every day, you decide not to meddle with the original asset allocation decision you are effectively making an active choice.