Active investment is great! Just pick the right domain

28 May 2021

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Investing actively is great! By this, I’m talking about putting your time, energy, talents, knowledge, and expertise into how you invest.

On the other hand, investing passively is great, too. It really depends on context.

In case you’re new to this blog, you’ll be aware that I’m a big advocate for investing via widely-diversified, low-fee, index-based funds, and to the largest extent possible, “setting and forgetting”. This is commonly known as “passive” investing.

What may not be as clear, is that I’m also an enormous advocate for “active” investing.

I’m not just talking about the fact that even if you invest in “passive” funds, it’s not entirely a passive exercise, since you still need to make sure you invest in a way that is suitable for you, based on your cash flow needs and personal, idiosyncratic tolerance for risk.

I’m talking about digging into the weeds, and spending lots of time and energy on specific investment decisions.

Here are some areas where I think active investment is more likely to pay off:

  • Investing in ventures in which you can have a direct impact on their ultimate success or failure (for example, your own business).
  • Investing in property: as much as it’s sometimes spoken of as a vehicle for passive returns, the most successful property investors I’ve come across have been very actively involved.

When it comes to publicly listed shares, I don’t think you’re likely to get better risk- and fee-adjusted returns by trying to pick winners in the share market (or even investment managers who can do so). If you can, you’re a very special case.

Even if you’re a special case, there are probably more productive uses for your time. If you can do this, you probably have other talents that could be better put to use elsewhere.

If you’re spending your time, energy, and talents on trying to pick shares that will generate a better-than-market return, how much value are you creating for others? What are the opportunity costs – for yourself and others?

I'd love your feedback.

Blogging is a funny experience. You hit the "publish" button for an article and it's out in the universe. After that, it's hard to know who reads this blog and how it resonates. I'd love to hear your thoughts, and find out about you.

With other domains, you can not only improve the prospects and magnitude of success – but you can add value to the world:

  • If you invest in yourself, you’re investing in your productive capacity, and your ability to create value for others.
  • If you invest in ventures, you’re likely to be successful to the extent that you serve customers and clients with valuable goods and services.
  • Most people who invest successfully in property don’t just sit on the property and wait for it appreciate – they also look for how they can make the property more attractive to people who will use it (residential or commercial tenants) or even those who will buy it again (strategic renovations).
  • If you invest in your health and relationships, it means you can be more productive, and can be there for your loved ones, to help divide the sorrows and multiply the joys.

By all means, invest actively. But if you’re going to invest actively in publicly-listed companies, then ask yourself: how else can I invest actively, and make the most of my talents, and limited time and energy on this planet?


Tags

active, active investment, passive investment


About the author 

Sonnie Bailey

Sonnie provides financial planning services via his business, Fairhaven Wealth (www.fairhavenwealth.co.nz). Fairhaven Wealth provides independent, advice-only, fixed-fee financial planning services. Sonnie is also a “recovering lawyer”: he has specialised in financial services, trusts, and estate planning.

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