What's the difference between passive and active investing, and how does it work in practice? Get your answers in this article!
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Imagine you’re on a long-haul flight to LA.
For most of the flight, the plane runs on autopilot. The route is locked in and the system keeps everything on course.
Most of the time, that works. Easy peasy.
But then the seatbelt sign dings. Turbulence rolls in. Or air traffic tells you to change course.
That’s when the pilot steps in to take over from the autopilot system. Because autopilot is great at following instructions, but it doesn’t have judgement.
So why are we talking about flying again??? Because investing can work in a very similar way.
Some investors choose a strategy that runs largely on autopilot - they follow the market wherever it goes. But others prefer having a professional actively adjusting the portfolio when conditions change.
Passive investing is the autopilot.
When you invest passively, your money tracks a market index like the S&P 500 in the US or the ASX 200 in Australia. Instead of picking individual stocks, you buy a fund that mirrors the whole index.
The goal is simple: match the market’s return over time.
Active investing is the pilot at the controls.
Instead of just tracking the market, a portfolio manager makes decisions about what to buy more of, what to trim back and when to shift direction.
For example, an active manager might:
The goal is either to outperform the broader market or to manage risk more deliberately. Or both!
If you’re wondering what this looks like in real life, an active global equity alpha fund makes it more concrete.
Take the Schroder Global Equity Alpha Fund as an example. It’s a type of active global equities strategy that aims to outperform a broad market benchmark, in this case the MSCI All Country World Index, after fees over a typical 3–5 year period.
According to its performance snapshot, over the past five years the fund has delivered returns that were 1.56% per year higher than the MSCI benchmark after fees. In simple terms, that means investors earned more each year on average than they would have by simply holding the index.
Of course, past performance doesn’t guarantee future results. But it shows how an active strategy can add value when executed well.
It doesn’t have to be either or. In fact, many portfolios combine both.
Some investors use passive funds as the core of their portfolio to provide broad, low-cost market exposure. Then they complement this with active funds to target specific opportunities or manage certain risks.
The key isn’t choosing sides. It’s understanding how each strategy works, what it costs, and whether it fits your goals and comfort with risk.
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