Active vs passive investing Pros, cons and examples

Advantages of active investing

• Flexibility: Managers can better respond to market changes, shifting investments to reduce exposure or seize new opportunities.
• Opportunity in volatility: Managers can take advantage of short term mispricing (when market prices temporarily deviate from their true value) by buying undervalued investments or selling overvalued ones.
• Tailored strategies: Portfolios can reflect specific goals, sectors, or ethical preferences.
• Downside protection: Some active strategies aim to limit losses during market downturns, offering greater stability for cautious investors.
• Access to a wider range of instruments: a passive private equity tracker, for example, simply doesn’t exist.

Disadvantages of active investing

• Higher fees: Management and transaction costs are typically much greater than passive funds.
• Underperformance risk: Active managers may fail to beat their benchmarks, particularly over the long term.
• Inconsistent results: Performance can often depend on the skill of the manager and market timing.
• Higher turnover: Frequent trading may have negative tax implications if the portfolio isn’t structured efficiently.

What is passive investing?

Passive investing tracks a market index through index funds or ETFs such as the S&P 500 or FTSE All-World.[3] The core idea: own the market, keep costs low and grow wealth steadily over time through compounding.

Advantages of passive investing

• Lower costs: Passive funds usually charge lower fees and have fewer trading expenses.
• Broad diversification: Index funds generally hold a wide range of securities, reducing risk tied to individual stocks.
• Simplicity: They can often be easy to understand, implement, and manage. They are generally suitable for long term, hands-off investors.
• Tax efficiency: Low turnover means fewer realised capital gains, which may help to reduce tax liability.

Disadvantages of passive investing

• Often there’s no chance of outperformance; by design you match the market.
• Limited risk control during downturns – if the market sells off quickly so will your portfolio.
• Portfolios can’t always adapt to sudden shifts.
• Broad exposure can often lead to high concentrations in popular sectors or overvalued stocks.

Active vs passive investing: What’s the difference?

Historical performance

SPIVA (S&P Indices Versus Active) reports show most active managers underperform after fees over longer periods. [4] For example, over a 10 year period, many U.S. large-cap active funds fall short of the S&P 500’s returns.[5] Conversely though in the UK, Japan and Global Emerging Markets, active funds typically outperform their passive counterparts more than 50% of the time.[6] Context matters and it’s not often as simple as one is always better than the other. As always, past performance is not indicative of future results.

An overlooked angle: Accumulation vs decumulation

Growing wealth is one challenge; living off it is another. When you begin to withdraw a steady income from your portfolios, three issues can often move to the foreground:

• Monthly income needs: You may need cash no matter what markets are doing. This means that, unlike during the accumulation phase, you may not be able to ride out short term market swings to wait for long term growth.
• Sequence of returns risk: If poor market performance happens early in your those losses can compound the effect of withdrawals. This may reduce the longevity of your portfolio, even with a strong average return over time. The order of returns matters.
• Volatility management: A highly volatile portfolio may recover over time, but if you’re forced to sell assets during a downturn to meet income needs, you could lock in losses and erode your capital faster than anticipated. Lower volatility can help smooth the ride and reduce the risk of depleting your assets too soon.

This is where strategy matters. Active portfolios can sometimes respond more dynamically to changing market conditions, raise cash when needed, or incorporate defensive assets to manage downside risk.

Active vs passive under monthly withdrawals

Let’s imagine an investor starts with £1,000,000 and withdraws £4,167 per month (5% annually). They have two options:

• A Saltus active portfolio (Multi Asset Class and Private Assets portfolios)
• A Saltus passive portfolio (Global Markets)

The Saltus Multi Asset Class (MAC) and Private Assets portfolios are actively managed by the Saltus investment management team. These discretionary portfolios include a wide variety of asset classes such as equities, bonds and alternatives. The Private Assets component, which may be included within the alternatives allocation, is designed to increase risk-adjusted returns and improve diversification through exposure to non-public investments.

In comparison, the Saltus Global Markets range follows a longer term, buy-and-hold strategy. These discretionary portfolios primarily invest in equities and bonds and express a strategic view of the markets without frequent tactical adjustments. Although they may include tilts to reflect certain market themes, they are not actively managed in the same way as the active range.

We tested both the Saltus MAC and Private Assets portfolios and Saltus Global Markets portfolio over a real-world period, to see how they held up under consistent monthly withdrawals.

Starting with our risk band 3 portfolios (medium risk), we compared total return performance over the period from 31 December 2016 to 31 May 2025 so almost eight and a half years.

Here were the results:

Looking at those results which would you choose? At first glance, the passive strategy appears to come out ahead. With a slightly higher total return, it seems like the obvious choice… right?

However, once we account for the regular withdrawals, the picture shifts slightly:

Surprised? Despite a lower total return, the active portfolio actually left the investor with more money in the end.

We observed a similar outcome in the higher risk band 5 portfolios (adventurous), covering the period from 31 December 2017 to 31 May 2025.

This is important to note, as it showcases that return alone doesn’t always tell the full story when you are drawing a regular income.

Why? The reason lies in the pattern of returns. Active portfolios can sometimes be better at smoothing out the ups and downs of the market. This becomes a real advantage when you’re regularly withdrawing money, because it helps avoid locking in losses during market dips (AKA sequence of returns risk). Essentially, you’re less likely to pull money out when the market is low, which can protect your portfolio.

However, the astute reader may realise that I have cherry picked a very specific time period to demonstrate the point. There were also some periods I found where the opposite results occurred. The point though is that investing in retirement isn’t just about comparing total returns, it’s about considering how those returns behave in relation to what you need from your portfolio. No single approach is universally superior, as both active and passive strategies have their merits, depending on your needs.

So, is active investing or passive investing better for you?

Both passive and active investing have distinct strengths, and neither strategy is inherently better than the other. The right approach depends on your goals, time horizon, tolerance for risk, and desire for involvement.

Sometimes, a blended approach may be the best option. This approach to portfolio management combines elements of both active and passive strategies, with the goal of leveraging the strengths of each. Ultimately, managing withdrawals and portfolio strategy during decumulation is both complex and highly personal. Working with a financial adviser or investment manager can help ensure your approach is tailored to you and your specific circumstances.