Active vs Passive: Which Investing Strategy Is Better? | NerdWallet

About this Video

• Video Title: Active vs Passive: Which Investing Strategy Is Better? | NerdWallet
• Channel: NerdWallet
• Speakers: Alana Benson
• Duration: 00:06:46

Introduction

This NerdWallet video compares active and passive investing strategies, explaining their differences and arguing that passive funds generally outperform active funds over the long term. The video details the costs and potential returns associated with each strategy.

Key Takeaways

• Active Funds: Involve a fund manager who selects individual investments. These often underperform market benchmarks due to the difficulty of consistently predicting market trends. They have higher expense ratios (0.5% to 1% of assets under management), meaning investors pay more for potentially lower returns. Studies show a low percentage of active funds consistently beat passive funds.
• Passive Funds: Track an existing index (like the S&P 500), mirroring its performance. They aim to match market returns, not surpass them. Expense ratios are lower (0.1% to 0.2%, with some having 0%), resulting in lower costs and potentially greater returns over time. Index funds and exchange-traded funds (ETFs) are common passive investment vehicles.
• Expense Ratios: A significant factor influencing long-term investment returns. Higher expense ratios in active funds can dramatically reduce overall returns compared to passive funds. A NerdWallet study highlighted that a 1% difference in fees could cost a millennial over $590,000 in returns over 40 years.
• Long-Term Investing: The video emphasizes the importance of long-term investment strategies, regardless of whether active or passive funds are chosen. The longer the investment period, the greater the potential for capitalizing on compound interest.
• Passive Funds Superiority: The video concludes that passive funds are generally a better choice for most investors, especially those with long-term goals like retirement, due to their lower costs and better historical performance compared to active funds.