Brian Dunhill
Jul 3, 20235 min
“Investing puts money to work. The only reason to save money is to invest it.” - Grant Cardone
As an expat investor, there are different approaches you can take to investing. In this article, we'll look at three approaches - Active investing, Passive investing, and Thematic investing. Armed with this information, you’ll be able to make better decisions about your own investments, as well as have a more in-depth conversation with your expat financial advisor.
In this article, you’ll learn about:
• What is Active investing?
• What is Passive investing?
• What is Thematic investing?
• What is the best investment strategy for expats?
A hands-on approach to investing is known as Active investing. It involves frequently buying and selling securities (stocks, bonds, etc.) with the aim of generating higher returns than average index returns by capitalizing on short-term asset price fluctuations.
Successful Active investing generally requires you to have a high-level of skill, knowledge and experience to be able to successfully analyze companies and market trends to be able to accurately decide the right time to buy or sell a security, bond or other asset.
As a result, an Active investor must have time to devote to research and analysis. For individual investors, most often this means paying a professional Active fund manager to research and pick investments on your behalf.
1) Active investing gives investors more trading options, as they can pick individual assets as they aim to beat the overall market performance.
2) Active investing also provides more autonomy and flexibility, as you are in control of your investments and retain autonomy and freedom in your investment decisions.
3) When successful, Active investing aims to deliver a greater return.
1) If you’re buying and selling regularly, you may not be able to optimize your trading activity from the point of view of taxes. In other words, you may have a higher capital gains tax bill each year (and more complex US tax reporting).
2) Active investing comes with an increased risk of losses, since it often means a greater exposure to unexpected short-term high volatility.
3) Active investing involves frequent trading, and that is associated with higher costs, such as brokerage fees, platform subscriptions etc.
4) Lastly, successful Active investing requires skill and time that most people don’t have, or otherwise higher cost implications due to paying an expert to stock pick for you.
Passive investing is an approach that aims to match a specific market index (for example, indices such as S&P 500, Nasdaq 100 and FTSE 100). This is achieved by investing in index funds or ETFs (exchange-traded funds) that track the performance of the chosen index.
Passive investors think long term, rather than seeking short-term gains from asset price or market fluctuations. Instead, they seek a steady average return over an extended period to build their wealth gradually over the course of time.
1) Lower fees - Unlike Active fund managers who Actively pick stocks, investments are made for the long term in Passive investing, hence avoiding recurring fees associated with regularly buying and selling.
2) Lower risk - Increased diversification and risk mitigation - Index funds and ETFs track indexes composed of hundreds of companies, sometimes even thousands of companies. If one company performs poorly, the negative impact on the overall portfolio can be mitigated by the positive performance of other investments: this is a powerful aspect from a risk management perspective. It is possible to obtain exposure to multiple sectors and geographies even with a small amount to be invested.
3) Ease of investment - You don’t require any specialized knowledge or need to perform deep research to choose the right asset to invest in, nor do you have to dedicate time to monitoring your investment regularly.
4) Delay capital gain tax - Passive investing is typically a “buy-and-hold strategy”, a long-term approach to hold investments for years or even decades. Hence, investors can delay capital gain tax charges until they sell the index fund or the ETF.
1) Limited investment options and lack of direct control - There’s less choice if you invest in index funds and ETFs. In other words, there is limited flexibility and the inability to respond to individual investment opportunities.
2) Less exciting - Less involvement in day-to-day market activity makes Passive investing more boring compared to Active investing.
3) Exposure to market downturns - During periods of significant market declines, passive strategies may experience losses that are proportionate to the overall market's decline. Passive investors who want to exit their investments at this point will likely crystallize losses.
Thematic investing is another dimension of investing: it is not the opposite of active or passive investing. Thematic investing is an investment strategy focusing on predicted long-term trends in the world rather than investing in a specific asset or indices. It allows the investor to capitalize or gain from the changes that happen across an entire industry.
Thematic investing allows investors to grab the opportunity created by the market's macro-economic, geopolitical and technological trends. These may be caused by emerging or disruptive technologies, changing value systems, and new ideas, for example.
Thematic investing example: BlackRock, the world's largest asset manager, has a Thematic investment philosophy focusing on several ‘megatrends’:
1) Rapid urbanization
2) Climate change and resource scarcity
3) Shifting economic power
4) Demographic and social change
Thematic investing is gaining popularity because of the growing influence of technology in businesses and in our day-to-day lives. This innovative approach enables the investors to outperform the traditional way, as it allows an investor the following benefits:
1) Place a bet on the future - Thematic investing allows you to invest in the trends shaping the future global economy and society.
2) Access - This strategy efficiently and effectively includes exposure to megatrends in an investor's portfolio.
3) Engagement and alignment with personal interests - by choosing a particular investment theme, investors feel more engaged and connected with their beliefs. This makes investing more relatable and enjoyable from an emotional point of view.
Successful Thematic investing is based on identifying potential structural changes and expected transformations early. Hence, a Thematic investment strategy favors long-term investors as it ensures that their portfolios are taken care of for future growth opportunities.
The thematic offering has been expanding quickly, with investment managers making more funds and ETFs for individual investors in recent years.
Expat investors should discuss their goals, time horizon, risk tolerance, and personal investment preference with their expat financial advisor to create a plan that suits them.
Everyone is different, and an investment strategy should be personalized to reflect your situation and preferences.
Expat investors don’t have to pick and rely on one investment strategy such as Active, Passive, or Thematic investing, but can blend all three in varying degrees if they wish to.
If you have any questions, don't hesitate to contact us.
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