Active or passive investing: which works better?

As a first-time investor, you have to decide: will you invest actively or passively? Before making that decision, you’ll naturally want to know which approach gives you the best chance of a high return. In this article, you’ll learn more about the differences between active and passive investing and take a closer look at the figures: historically speaking, which has delivered the highest returns?

What is active investing? Picking and timing

Active investing means doing two things: you pick out your own investments and try to time your buys and sells as cleverly as possible. This requires you to make a number of judgements:

• Which investments are likely to rise in value faster than the market as a whole?
• When is a good time to buy them at a favourable price?
• When will their value peak, and when can you sell them for the maximum profit?

To do all this properly, you need to keep track of a lot of things: stock prices, the news and company figures, for example. All these are factors that can influence the value of investments.

What is passive investing? Diversifying and sitting back

With passive investing, you do exactly the opposite: you invest across a broad range of assets, for example through an index fund or ETF, which allows you to diversify your money across hundreds or even thousands of companies in a wide variety of sectors and regions around the world. Keep in mind that not all index funds and ETFs are broadly diversified, so be sure to choose the right ones for a passive investment strategy.

Additionally, you trade as little as possible – this is known as ‘buy and hold’. You trust that your investments as a whole will increase in value over the long term as the global economy grows. So far, this has always been the case, despite occasional dips (of course, past performance is no guarantee of future results).

With passive investing, you don’t pick out assets or time the market. You spread your risk across a range of investments and let time do its work. This means you don’t have to do lots of research, which saves you time.

What the opposing camps have to say

But which of these strategies is better? There’s a lively debate about this, with die-hard supporters on both sides. Here’s what they say:

• Active investors: ‘With our strategy, you can achieve returns that passive investing can't.’ With passive investing, you always achieve the (weighted) average return of all your investments combined (the index) – nothing more, nothing less. With active investing, you can find assets that actually outperform the average; real ‘winners’. If you also time the market cleverly, you can ‘beat the market’: achieve a better return than with passive investing.
• Passive investors: ‘With our strategy, you have a better chance of a good return.’ Active investing is very difficult: you essentially have to predict the future based on all sorts of signals. The chance of making a wrong assessment (and thus a mistake) is high. With passive investing, you don’t have to make such assessments, so you’re less likely to make mistakes.

What does research say? Let’s look at the figures

But who is actually right? This has been extensively researched. And it turns out that passive investors have the figures on their side. The two studies below are examples of this.

The SPIVA Scorecard

A well-known ‘arbitrator’ in the passive-versus-active debate is S&P Dow Jones Indices, which has been publishing the SPIVA Scorecard since 2022: a half-yearly comparison between actively managed funds and their benchmark index.

The Scorecard shows that, historically, actively managed funds have underperformed: in most cases, they generate lower returns than passive funds.

Percentage of actively managed funds in Europe that underperform the index

Source: SPIVA Europe Scorecards dated 31 December 2025.

If you look at the table above, two things stand out:

• The majority of actively managed funds underperform the index they are trying to beat.
• The longer the period, the smaller the chance that an actively managed fund will outperform. The accompanying Persistence Scorecard shows that funds which perform very well in a given year are unable to sustain this performance in subsequent years. This suggests that ‘beating the market’ is more often a matter of luck than wisdom.

What is an actively managed fund?

An actively managed fund is an investment fund in which the fund managers – the professionals who put the fund together and manage it – actively buy and sell investments. They do this to achieve a higher return than a comparable passively managed fund. 

What about individual investors?

SPIVA focuses on professionals, but how do retail investors fare? This has also been researched, for example by Brad Barber and Terrance Odean at the University of California. In a now-famous paper, they too conclude that active investors, on average, underperform passive investors.

Conclusions from research conducted by Barber and Odean amongst 65,000 investors between 1991 and 1996: 

• The 20% of investors who traded most actively achieved an average return of 11.4% (after costs)
• The 20% of investors who traded the least achieved an average return of 18.5% (after costs)
• In short: the most passive investors achieved a return 7 percentage points higher than the most active investors in the study (2000)

Source: The Behaviour of Individual Investors, Barber and Odean, 2011

The transaction cost effect

Transaction costs play a major role in these results: active investors trade more frequently, and the costs associated with this weigh on returns. However, Barber and Odean also point out that retail investors are not particularly good at selecting stocks – they fail to identify the ‘winners’.

Do women invest better than men?

Fun fact: on average, all active investors underperformed passive investors, but men did even slightly worse than women. Barber and Odean (2011) explain this by the fact that men buy and sell more frequently, and therefore incur higher transaction costs.

Why is active investing so difficult?

So, bad news for fans of active investing: the figures show that they are, on average, underperforming their passive counterparts. It really isn't easy to beat the markets:

1. Predicting the future is (almost) impossible. Stock prices are influenced by so many factors that there’s a very high chance you’ll miss something important.
2. Costs really add up. Every transaction has a price. You have to recoup those costs each time before you can even begin to beat the index.
3. You might come out on top once in a while, but sustaining that success is difficult. Even professionally managed funds that have beaten the index on one occasion often fail to repeat that performance in the years that follow.

So: which offers the best return?

While active investing can, in theory, yield higher returns than passive investing, historical research shows that passive investing has delivered the best returns on average. For most people – whether professionals or private investors – active investing has not worked.

Of course, whether you choose to invest actively or passively remains a personal choice. Do you want to take the gamble by selecting and timing the market yourself? Or will you opt for a diversified, passive investment approach? Ultimately, this is up to you as an investor. But whatever you decide, make sure you’re well-informed and base your decision on research.