Active vs Passive Investing
- Greg Skeoch
- Nov 24, 2025
- 4 min read
Contents
What is Active Investing?
Active investing involves a fund manager or team actively making decisions on what to buy or sell in an attempt to outperform the market. They research companies, study market trends and adjust portfolios as market conditions change.
As this approach involves significant levels of research and management, active investments tend to have higher fees than passive investments, however they can result in higher returns or reduce losses in a falling market.
Advantages of Active Investing
Opportunity to outperform the market: As the managers of active funds have free reign on investment choice, a skilled fund manager can achieve a higher level of return than simply tracking the market performance.
Limiting loss: Some managers look to limit loss in falling markets which provides a safe strategy for the cautious investor.
Flexibility: Active fund managers can respond quickly to market changes, buying or selling when an opportunity arises.
Tailored Strategies: There may be a specific focus such as income generation, ESG requirements or capital preservation, providing a personalised approach to investing.
Wider investment choice: Unlike passives, an active fund is not limited to the exact holdings of a particular index and may be able to take advantage of other opportunities available.
Disadvantages of Active Investing
Higher costs: Higher management costs can reduce overall returns especially if the fund does not outperform the market.
No guarantee of outperformance: Ultimately, you are relying on the fund manager being able to outperform the market consistently, something which even skilled managers can struggle to do.
Marketing timing: Similar to outperformance, active managers try and time the market to buy low and sell high but getting this wrong can result in reduced returns.
Tax inefficiency: Depending on where the investments are held, frequently trading can lead to realising gains that could create a tax liability for the investor.
What is Passive Investing?
Passive investing has a simple approach and instead of trying to beat the market, the goal is simply to match it. Passive investments will track a market index through index funds or ETFs such as the FSTE 100 or S&P 500.
With the simplicity of this approach, passive funds are often significantly cheaper than active investments. They could however, represent higher levels of risk, particularly in falling markets as no changes would be made to the underlying investments.
Advantages of Passive Investing
Lower costs: This can represent significant value for an investor due to the lower fees and fewer trading expenses.
Tax efficiency: Due to fewer trades, there would be less opportunity for triggering capital gains tax, potentially reducing tax liabilities.
Simplicity: Often, hands off investors who are investing for the long term will favour passive investments as they are easy to understand and manage.
Long term reliability: Markets typically increase over time. By tracking the index, passive investors can benefit from the natural upwards trend without needing to outguess it.
Transparency: Passive funds clearly show what they are invested in, leaving no ambiguity over where the money is actually invested.
Disadvantages of Passive Investing
Will never outperform the market: As passive funds are designed to match the market, returns will never be able to exceed the index they are tracking.
Downside protection: In falling markets, there is limited protection as there's no manager making changes to reduce the impact of a fall.
Potential overexposure to big companies: As of October 22nd 2025, the "Magnificent Seven" accounted for 36.6% of the S&P 500, demonstrating what could be a significant risk if any of those companies were to crash.
Remaining invested: Psychologically, it can be difficult to stick to the plan when markets are in a downturn and there are no changes being made to reduce losses.
Which option is right for me?
This is a highly personalised question which would require full analysis from a financial adviser but there are some basic approaches which may work.
A few examples:
Sarah, 42, has a planned retirement age of 65.
She has a high attitude to risk.
She is a working professional with a young family who wants to contribute to her pension and forget about it.
In this scenario, Sarah may want to consider the use of passive investing. She has a long time until she is likely to need the funds so could ride out the volatility of being invested in to an index fund, while also benefiting from low costs to maximise her overall returns.
Mike, 63, is planning for imminent retirement and will need to use his pension to help fund his intended lifestyle.
He once considered himself to have a high attitude to risk but now doesn't want to lose money from the pension pot he's spent his whole life accumulating.
He does however still want his pension to provide a return to maintain it's value over time against the effects of inflation.
Whilst Mike historically may have fallen in to the same passive funds Sarah may consider, using an actively managed portfolio may now suit his goals more effectively. The benefit of the added flexibility to make changes when markets are falling, could prove to be worth far more than the additional added cost.
So overall, which is best?
There's not one answer to this question. While each have their advantages and disadvantages, ultimately what matters most is finding an approach that suits you. Sometimes, a combination of both active and passive options may work best, in particular when we talk about taking pension income.
If you're unsure on what's right for your situation, contact us today for a free financial review. We can help tailor an investment strategy that balances cost, risk and opportunity so your money works hard in the way that makes the most sense for your goals.
The value of units can fall as well as rise, and you may not get back all of your original investment.
Approved by In Partnership FRN 192638 November 2025.
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