Investing Styles: Are You Passive Or Are You Active?

Bryce: [00:02:21] Welcome to get started investing in this podcast, we cover all the basics you need to start your investing journey. We unpack all the jargon and confusing bits here, your stories with the goal of making investing less intimidating. And along the way, we hope to have a bit of fun. My name is Bryce and as always, I'm joined by my Equity Mates Ren. How are you going? [00:02:40][18.4]

Alec: [00:02:40] I'm very good Bryce as always, very excited for this episode, but particularly excited for what we're about to do here with Get Started Investing feed because we're changing up the format a bit. [00:02:51][10.8]

Bryce: [00:02:51] We are changing the format. We've taken on board some feedback from our community survey for twenty twenty one. You guys thoroughly enjoyed the first twelve episodes of the series and we wanted to continue that in the best way that we can, unpacking key fundamentals that are going to be important for your investing journey, but in a way that sort of makes sense and is a continuation and will help you take one step at a time. Yeah, yeah. [00:03:16][24.4]

Alec: [00:03:16] So the twelve part series was great because it was a narrative arc. It was from I don't know anything about investing to I have the information and confidence to make my first trade. And that was something that we particularly liked about the first twelve episodes. And we want to try and bring that back in some way without retreading old ground. So we're really trying to walk the middle path here. So rather than doing just one off episodes, talking about a particular element of, you know, getting started with investing, what we're going to do is what are we calling them? We're calling them chapters. We call mini series, whatever we're going to call them curriculum units. And they'll be a test at the end of each of them. Now we're going to we're just going to do a sort of mini series on a particular topic and try and have that sort of, you know, to go narrative arc. You don't need to know anything about the end of it. Hopefully you'll feel comfortable about a particular topic, you know, similar to what we did with ETFs, with beta shares or brokers with superhero. We want to bring that sort of mini series vibe to it. So first cab off the rank. We've had a lot of questions, both in the Facebook group and in the listener survey around investing styles and and what are what does that even mean? And like how should one approach investing? Because the fact of the matter is, there's a lot of ways to make money in the stock market. There's not one size fits all approach. There's not one perfect way to do it. So in the next in this episode, in the next two episodes, you'll you'll know everything you need to know about the different investing styles and you'll have the tools and the information to understand what they all are and make a decision about which ones are right for you. [00:05:05][109.0]

Alec: [00:06:18] That's it. That's it. All right. Well, yeah, let's get stuck in so investing styles. Let's start by, I guess, defining the term. What do we mean when we talk about investing styles? [00:06:29][10.6]

Bryce: [00:06:30] At a high level, it's the methodology or the principles that you, I guess, invest by. Yeah. Yeah. [00:06:36][6.0]

Alec: [00:06:36] So people may have heard things like I'm a growth investor, I'm a value investor, I'm a passive investor, I'm a day trader. They're all different styles of investing. And I think something that we've we've already said, but I think, you know, is worth repeating throughout is that all of these different styles have merits. You can make money, all of these different ways in different time periods and at different points in history. Some have performed better than others. And so it's just a matter like what we want to do here is not say, you know, if you're a value investor or if you're a day trader, that's dumb. Don't do that. But really, it's just you should understand the difference. And I understand what you're doing because, you know, you can make money plenty of ways, but you can also lose money if you don't know what you're doing. [00:07:28][51.6]

Bryce: [00:07:29] Yeah, if you don't know what you're doing. And also, history shows that successful investors are the ones that stick to what they're doing as well. So, yeah, we'll get to that in a little bit. But yes, investing styles, as you said, Ren growth value. It's the way in which you invest. But the the big question, I think, if you're starting is, does it even really matter? Does an investing style matter to me if I'm starting out in my investing journey? [00:07:56][27.8]

Alec: [00:07:57] Well, style doesn't matter to me. As you know, having a crack at me before we started recording, I'm very much the same Equity Mates Taisha most days. No, I do have multiple, multiple editions, good or good. But look, investing styles matter because if you're just buying something because you think it's good, but that sometimes isn't enough. So investing styles matter just because you know what you're buying and then why you're buying it, like how you expect to make money on something rather than sort of just spraying and praying. So, yeah, it matters in the sense that it will help you sort of have some discipline, I guess. But I think the other element of it is something that we often speak about but often gets overlooked in people's rush of blood to the head. I want to get started investing. I'm going to do it today. I'm going to sign it to a broker and just throw some money in. Is just your investing style should align to your investing goals. And so it matters in the sense that your you should just have like some idea of like how quickly you want to make money, how much risk you're willing to take on, and your investing style sometimes can come out of that. So to give you an example, if I'm like I want to be a millionaire next year, then taking a passive approach where I just buy the whole market and wait isn't going to make me a millionaire next year. So, yeah, it matters in firstly because it's important to have a plan and know what you're doing and then secondly, because it should align with your goals. [00:09:39][102.4]

Bryce: [00:09:40] Yeah. Don't get put off though, because it's easy to say you're a value investor. But on day one, if you want to, if you haven't studied finance, if you've never gone in and tried to do a DCF discounted cash flow, like you may want to take a value investing style or approach, but don't let that stop you if you don't know the ins and outs of it from the beginning. [00:10:03][23.2]

Alec: [00:10:04] Yeah, yeah, yeah, yeah. 100 percent. And it changes like over the course of this three part series, we'll talk about how our investing styles have changed because they have you briefly doubled as a day trader back in like what, twenty. Eighteen, twenty nineteen. [00:10:19][15.3]

Bryce: [00:10:20] Yeah. Well this is the point. Like you don't it takes time to find out who you are as an investor. And, you know, it's you might start with a passive approach and then realise that you love the active hands on which we'll get to in a little bit. You might realise that you don't have the emotional, I guess, control for day trading. So it's you don't have to start with the one that you're going to end with. It's about finding what works for you. [00:10:45][24.8]

Alec: [00:10:45] Yeah. So in this episode, we want to really just, I guess, introduce the biggest decision when it comes to investing styles, which is passive, very active. Passive is a great way to make money. And if you're busy and you've got a whole bunch of stuff that you prefer to be doing with your time other than learning about investing or analysing companies, that is an investing style. That is right for a lot of people. And then over the next two episodes will then break down some of the key types of active investing and then we'll tie it all together and sort of talk about how you can make that decision if you're unsure. So before we get into that active, very active investing or passive investing discussion, there's one question that I want to ask you. So you we just spoke about how you're not locked into life, how you can change your style over time. We've both changed our styles. I would hazard a guess that almost every investor has changed their style over time. Warren Buffett, history's greatest investor, famously changed his style over time. So there's nothing wrong with changing your style. My question my other question for you is, do I need to choose just one style? [00:11:58][73.1]

Bryce: [00:11:59] No is the short answer. [00:12:01][1.2]

Alec: [00:12:01] Okay. What about the long answer? Can't get [00:12:02][1.3]

Bryce: [00:12:03] much shorter than that [00:12:03][0.6]

Alec: [00:12:04] simulator's podcast thrive on short answers. I must say, [00:12:07][3.5]

Bryce: [00:12:09] no, you don't need to choose one. Choose one style. Many investors, you and I included segment or take our total pool of investable funds or the money that we have. And often segmented into into different styles for different reasons, for example, as we're about to discuss, you can take a passive approach for the majority of your your funds and let that sort of build over a long period of time. And then if you want to take small chunks, eight, 10 percent of of your investments and take an active more hands on approach, that's one way you can you can do it as well. Even if you look at some of the big fund managers here in Sydney, you know, they will have many different funds with many different approaches or styles. So you've got one fund manager who will have a small caps fund, a growth fund, a diversified you know, you can already say that whilst it's the same investing or investment company, they take different approaches for different segments of their money. So I think the main thing is whatever way you split it, make sure within those styles you stick to that strategy. [00:13:13][63.7]

Alec: [00:13:13] Yeah. So just like Bryce during the wake is business casual in his dress style and on the weekend he's EDM Candy Rifa. I'm not sure sorry. You know, on the weekend he's gothic chic. [00:13:26][13.2]

Bryce: [00:13:27] OK, weird. [00:13:28][0.9]

Alec: [00:13:30] Yeah. You can have different styles and people will have heard us talk about a core and satellite approach when it comes to investing. And that that is really, you know, the core is, as you were saying, that passive approach and then the satellite can be a more active approach. So, yeah, you're not locked in for life. You don't have to choose just one style. The main thing is you just aware of the different ways you can make money in the market and you're having a think about which one is right for you. So with that said, we want to spend the rest of this episode breaking down the biggest decision when it comes to your investing styles. Are you a passive investor or are you an active investor? [00:14:10][40.3]

Bryce: [00:16:10] So Ren, you frame it as the biggest question an investor needs to make at the beginning of their journey? [00:16:15][4.3]

Alec: [00:16:15] Did I frame it like that? Yes, I think this is the biggest question when it comes to investing styles. But, hey, we'll go with it. [00:16:23][8.1]

Bryce: [00:16:23] It's it's an interesting one, though, because about two minutes ago we said we're both. So you don't really have to are [00:16:30][6.1]

Alec: [00:16:30] you got to make a decision about like, do you want to be one the other or both or neither. Neither. We wouldn't recommend because then you're not investing, but. Yeah, yeah. [00:16:38][8.5]

Bryce: [00:16:39] So look, it's you would have heard of passive, very active. [00:16:41][2.3]

Alec: [00:16:42] But if you haven't, Bryce is going to [00:16:43][1.4]

Bryce: [00:16:43] be in terms of an investing approach for the for the beginner investor I think will start with passive because it is it's obviously in trend at the moment. And given the products that many beginner investors are buying, ETFs, index funds, that really aligns with the passive approach. So let's start there and then we'll touch on active. [00:17:05][21.4]

Alec: [00:17:06] Can we before we really unpack them, just think about the the to understand the distinction as we're going through them. Passive. You're not doing anything active. You're doing something. [00:17:16][10.8]

Bryce: [00:17:17] Well, yeah. Yeah, yeah. When are we going to unpack that. [00:17:19][2.2]

Alec: [00:17:20] Well yeah. Yeah. I didn't want to get too deep into one before it was. Yeah. [00:17:24][4.5]

Bryce: [00:17:24] Yeah sure. OK, well yes. Passive is where you're not doing a whole lot. [00:17:29][4.3]

Alec: [00:17:29] So what does that mean. [00:17:30][0.8]

Bryce: [00:17:31] It's, it's limited buying and selling. And really what it means is that you're putting money into the market and then taking a very hands off approach with what you're thinking about, buying the types of investments you're buying. You're not necessarily going to be buying individual stocks. You're not putting in time and effort to research individual stocks. Your goal is just to get the market return over a long period of time. [00:18:01][29.8]

Alec: [00:18:01] Yeah. So the idea behind passive investing is that the stock market continues to grind upwards as people are innovating. Companies get more productive, more profitable. You know, like the story of capitalism is a story of constantly chasing growth. And so the theory behind passive investing is that you don't need to make decisions yourself. You don't need to pick winners. You don't need to decide to try and pick which companies are going to do the best or which ETF you like, which the ETFs are going to do the best. You can just say I'm making a bet on capitalism. Basically, I'm making a bet on human innovation and I'm just happy to take the market. Average returns now since nineteen hundred's the All Ordinaries in Australia, which is that index, like all the ordinary shares in Australia, including dividends, has returned thirteen point two per cent. People talk about the stock market average these days being between seven and eight per cent. And so passive investing approach is if I get that seven, eight, 10, 13 percent on average over 40 years, I'll I'll do incredibly well for myself. And just to put some numbers to it, if you put a thousand dollars a year into the market and did nothing else, you just put a thousand dollars a year into the market over forty years and you got that thirteen point two percent historical average for the Australian share market, you'll have over a million dollars after 40 years. So that's passive investing. Buy, sit and wait, [00:19:45][103.4]

Bryce: [00:19:46] buy, sit and wait. So from a difficulty level, it is pretty it's pretty low in terms of a difficulty level. You don't need to know a whole lot to get started with a passive approach. There's plenty of products and apps available that can get you started from the micro investing apps that are out there. All the ETFs and index funds that are available will help you kick off your passive investing style. The time required is an important thing to consider here as well. If you're a busy person with a hectic job or looking after family members or whatever it may be, and you don't have the time or the knowledge or discipline to sit down and research individual stocks and build a portfolio and understand portfolio management, then, you know, this is probably the best place to start and think about your investing styles as passive. [00:20:39][53.2]

Alec: [00:20:40] Honestly, I think even if so, we both we both didn't start all. You kind of started investing this way, but sort of. Yeah, but for me, you know, I enjoy some active investing, but I wish I had started investing. I just wish I had bought a ASX 200 index in Australia or an S&P 500 index in the US and just learnt got my got my my toe in the water. And then you can sort of. Go up. So in terms of what I what you would be buying if you were just a passive investor, we've spoken about market indexes, which are funds that just hold a little bit of everything. The ASX 200, 200 biggest Australian stocks, the S&P 500, America's 500 biggest stocks. You can buy those through a broker on as an exchange traded fund. What else would I be buying individual stocks on? [00:21:43][62.9]

Bryce: [00:21:43] Highly unlikely. Yeah, highly, highly unlikely. For more information on the ETF exchange traded fund side of things, we do have the three part episode with beta shares that goes through ETFs for beginners. So head over there for a bit more info. But yes, no, I would not be buying individual stocks. [00:22:01][18.1]

Alec: [00:22:02] What about a managed fund? [00:22:03][1.5]

Bryce: [00:22:05] You could be buying into a managed fund. Yes. You had no reason. You wouldn't essentially all that would be doing for those that have just joined us on their journey and managed fund is as it is in the description, the fund managed by a professional. And you give them your money for them to look after and invest on your behalf. So in terms of ease, it's not much easier than giving it to someone else to look after. [00:22:29][24.5]

Alec: [00:22:31] So this is so passive. Is that real set and forget? I don't want to be involved in it. I just want to let other people, you know, do their thing and for me to make money. So that's that's passive. Yeah. Active. [00:22:44][13.0]

Bryce: [00:22:45] Active, yes. It's obviously the flip side of passive. And this is where you take a much more hands on active approach in, you know, the investing decisions that you're making, the research in time that you're putting in to make those decisions. And then the active management of your portfolio, which is probably an underrated aspect of active management. People put a lot of time and energy into finding the stocks, buying and buying, and not a lot of research and energy into managing the stocks once you've bought them, which really is where the money is made and lost. Yeah, and in some instances. So let's take the same approach, the go for active management. You heard Ren just before talking about the average return of the stock market over 20, 40 years. And there's nothing wrong with taking that return over a long period of time. The goal of active management, and this is the style that many professional investors take, is to beat that return. Yeah, they want to be able to say that the market returns seven per cent this year. I returned 10 percent. Therefore, I am a better investor than the broader market. And that's where they make their money. And, you know, the big investors, Warren Buffett's of the world have obviously been able to beat the market over a long period of time, but only, say five percent of professional investors are able to do that. The rest over the long over the long term, over. [00:24:13][88.0]

Alec: [00:24:13] A lot of people can do it in a year here or there. Yeah, well, yeah, yeah. But long term, it's difficult. [00:24:18][5.3]

Bryce: [00:24:19] So that is the goal of active management is to beat the market. And then it all kind of falls from there because you can imagine if you are trying to beat the market, you're going to have to put a lot of time and energy and think about your investments in more detail. So Ren you asked what sort of investments would you be making in passive? What sort of time and effort goes into the investments that you would have inactive and what would they be? [00:24:44][24.9]

Alec: [00:24:44] So I think the with active investing, there's so many different elements to it. So with passive, it's basically if you're a passive investor, you're buying market indexes or just, you know, basic things that are only a bit of everything. And you want to get the market average returns. There's not a lot of different ways to go after that with active. There's so many different branches under, you know, under active investing. There's different different time horizons, different, I guess, things that the investors are looking for, different theories about how companies make money or stocks go up in value, all that stuff. So basically, the to answer the question that you asked, what kind of things would you be buying as an active investor? It's the world is your oyster. It's everything from market indexes to alternative assets to stocks. And then you go into all the derivatives stuff, you know, like options and warrants, none of which you need to worry about as a beginner investor or an advanced investor. No, I've never bought a derivative or tried a derivative. I don't think you know, so don't even worry about that. But, yeah, basically, the world is your oyster. Anything's on the table depending on the strategy you're following. But in terms of the difficulty and the time required it, obviously. Scales like, you know, there are some of those active strategies that are more difficult than others, but relative to passive investing, it's high. Yes, you if passive investing, you can buy something once a month or once a year and then sit on the beach and go have a big night with your mates. You if you're going to be an active investor, you can still have a big night with your mates, 40. You definitely do. But you do need to spend some time on this. [00:26:42][117.7]

Bryce: [00:26:42] Yes, absolutely. So, yeah, to recap, passive is about limited buying and selling long term approach. Taking the average market return, low difficulty level to get started in terms of knowledge required and time required is also low. And the types of investments you'd be making would be into index funds, ETFs, managed funds, those sorts of investing products, whereas active is very hands on actively buying and selling. The goal is to beat the market and difficulty level as well as time required is high. And as Ren just pointed out, you pretty much can invest in whatever you want. [00:27:22][39.3]

Alec: [00:27:22] So here's the final question. The most important question. How do you know what you are? How do you know if you should be investing passively or actively? [00:27:30][7.6]

Bryce: [00:27:31] There are a few questions that you can ask yourself to answer that [00:27:34][3.2]

Alec: [00:27:35] this is your morning mantra. [00:27:36][1.0]

Bryce: [00:27:37] Yes, I have these tattooed on my forehead to remind myself, look, I think there are a couple of questions to this is to sort of figure out before you start. And, you know, if you start with one approach, you'll quickly work out where you end if you don't ask. So as we did, we started out with the probably a more active approach than we should have and slowly reverted to passive and now have a bit of a bit of both in our world. But yeah, so for me, it's about asking yourself, what is your investment goal? As you said, Ren, if you're looking to beat the market in one year and make a million dollars in one year, then you're going to have to put in a lot of hands on work to do that. So you're taking an active approach, whereas if you're looking for financial independence and security over 40 years, then taking a passive approach and building that wealth over a long period of time is the answer for that, do you? Yeah. So do you need to beat the market? Well, if it's active, if you're happy with market returns over a long period of time, it's a passive approach. And then I think the biggest thing is do you need to ask yourself, do you have the time and skills to actually sit down and and give justice to researching stocks and actually making faces for your investing decisions and writing down? You know, why you think this business is is good and those sorts of things. If you don't have the time for that, it's highly likely you don't have the time to be an active investor. [00:29:02][84.8]

Alec: [00:29:03] Yeah, the skills you can develop the time is the thing that is incredibly difficult to make. [00:29:09][6.5]

Bryce: [00:29:10] Morel's Absolutely. Absolutely. So a few questions that you could ask yourself. [00:29:15][5.0]

Alec: [00:29:15] One more that you've written down, which I think is worth touching on. Oh, yeah. Your final question is, am I an emotional investor? And I think that's really important. Like, you've got to know yourself and you've got to know how you're going to react if things aren't going your way in markets. If you're someone who's likely to panic, lose faith in what they've the decisions they've made and sell out at the worst possible time and lose money, it's important to know that about yourself. And either you put a plan in place to manage that or you say maybe Afterpay investing isn't for me, or maybe I want to approach like a less risky strategy, at least until I'm comfortable enough that I know I'll be able to manage the emotions of the market. [00:29:55][40.7]

Bryce: [00:29:56] Yeah, well, Ren, that does bring us to the end of today's episode, one of three all on investing styles. Next episode, we're actually going to be playing a bit of a game to give some insight into the different types of investors that that you might be. There's growth, value, date value, technical momentum. There's plenty to go through. But we're going to play a game so that we can break it all down into a digestible and accessible way so that you can hopefully understand what might be best for you. [00:30:27][30.9]

Alec: [00:30:28] Yeah. And look, if you've listen to this episode and decided that I'm going to be a passive investor, we still think you should listen to the next two, because as we said, you know, you might change over time. And it's important to sort of know what else is out there and how how else people make money. But we've really done all we can do on passive investing. We'll put it all together at the end. But we were episode two is then like, what are the what are the active styles? [00:30:52][24.7]

Bryce: [00:30:53] Yeah, stick around. Third episode, you'll get a bit of insight into how both the Ren and I manage our portfolios from a passive and active approach. [00:31:01][8.2]

Alec: [00:31:02] So we also we also are doing a month in the life of Yes. Masters, including passive investors Bageye. Bryce will be speaking from his personal experience, but [00:31:11][9.2]

Bryce: [00:31:11] I won't be speaking because I don't do anything wrong. [00:31:14][2.3]

Alec: [00:31:14] Well, you can still speak again podcast on thriver people as well. [00:31:19][4.6]

Bryce: [00:31:19] That's a wrap. Just a reminder again, live show us up for details or you'll find a link in our Instagram page. We do have a couple of shows that are worth checking out. You're in Good Company is a new show from Equity Mates Media. Again, all about the adventures in finance and investing of the two hosts, Sophie and Maddy. So go and check them out. Comedian, The Economist is another one we've got, which is all about the world of macroeconomics through the eyes of a comedian, Thomas and his brother, [00:31:49][29.9]

Alec: [00:31:50] comedian Adam, and his Cry-Baby economist [00:31:53][2.3]

Bryce: [00:31:53] Thomas. So check that out. And if you are feeling a bit adventurous and like you're ready to to move up the rung on the investing a lot more than we do, obviously have Equity Mates investing podcast, which you can come and listen to us discuss many things with experts in the industry. So thanks for listening. Always fun Ren to chat stocks and we'll pick it up next week. [00:32:12][19.4]

Alec: [00:32:13] Sounds good. [00:32:13][0.3]

Speaker 4: [00:32:14] Get Started Investing feed is a product of Equity Mates media. All information in this podcast is for education and entertainment purposes only. It is not intended as a substitute for professional finance, legal or tax advice. The hosts of Get Started Investing feed are not financial professionals and are not aware of your personal financial circumstances. Before making any financial decisions, you should read the product disclosure statement and if necessary, consult a licenced financial professional. Do not take financial advice from the podcast. For more information, head to the disclaimer page on Equity Mates website where you can find the ASIC resources and find a registered financial professional near you. In the spirit of reconciliation, Equity Mates media and the hosts of Get Started Investing feed acknowledge the traditional custodians of country throughout Australia and their connexions to land, sea and community. We pay our respects to their elders past and present, and extend that respect to all Aboriginal and Torres Strait Islander people today. [00:33:07][52.6]

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