When the market volatility is expected to increase, investors will be heading to passive investment. Passively managed funds, such as funds in exchange trading, could be the option when everything goes unpredictably in the market. However, is it a truly right option. Is it really less risky than active investment?

Financial advisors say that passive investment is not always safer than active investment. “It can be even riskier,” said Vincent Barbera (a managing partner of Newbridge Wealth Management) in an interview. Before making a decision, the investors need to make sure that they choose the right place to park their money.

Facts to Know about Passive Investment

Barbera – a certified financial planner – said that many investors mistakenly thought that passive investment is a safer option in case of increasing market volatility. “That’s scary,” Barbera said. She admitted that passive investing has been increasingly popular during the last few years. Exchange Traded Funds are increasingly attractive because of lower fees, tax efficiency, better transparency, and liquidity.

Unfortunately, financial advisors suggested that investor must look at this fact with caution. Despite looking attractive, passive investment is related to several factors, which can make the trading end up with failure. They include investor sentiment, trend, and economic factors.  Economists said that the United States is in the final phase of an economic business cycle. It means that everything may happen in an unpredictable way.

Consequently, Barbera said that some financial advisors have suggested their clients to move their money to actively managed funds. His company has done so, by moving some money out of Exchange Traded funds to active investment. Given the forecasts for market storm, the investors are suggested to make a mix in investment choices.

Chance for Combined Active and Passive Investment

Financial advisors suggest the investors to combine active and passive investment. Active investment can be even safer during the market storm, since the managers can manage the fund in sideline business to protect the investors’ money from downsides. In other words, active fund managers can do something to minimize and even to prevent the risk for loss.

As Barbera said, active fund managers can decide to invest or not to invest according to the market situation. When the market is really volatile, they may choose not to invest. This way, the investors’ money are protected. Furthermore, by combining active and passive investment, the investors still have spare funds. Despite higher costs, combined investment prevents them from losing all of their money.

However, Barbera warned that not all active managers have equal performance. Many of them are successful, but many others fail to protect the investors’ money at highly volatile market. According to a database of Morningstar, in 2016, about 69% of 24.000 actively managed funds failed to meet their targets. Therefore, the investors need full vetting before making a decision.

This was what Barbera did with his clients. They actively researched the actively managed funds before suggesting the clients to choose one. In fact, long-term stats of actively managed funds are not so promising. It is not surprising that many firms still choose Exchange Traded Funds (ETF) for equities.