Posted on September 11, 2024 by Katherine Fox.

Active versus Passive Investing for Gen X, Millennial, and Gen Z Inheritors 

One of the most common questions I hear from new inheritors?

"What do I do with all this money?" 

You’ve received a life-changing amount of wealth. Now you’re deep in the weeds trying to understand investments, and you don’t know where to turn.

You’ve got a variety of “experts” in your ear. But their advice doesn’t resonate with what you want and you can’t figure out exactly why. 

At some point, you remember hearing about “active” versus “passive” investing. The distinction seems important, but you haven’t been able to get to an answer on your own. 

As a financial advisor for inheritance who's seen it all when it comes to Gen X, Millennial, and Gen Z inheritors, I'm here to break down one of the biggest debates in the investing world: active versus passive investing. 

Have you been wondering:

• What’s the difference between active and passive investing? 

• What are the pros and cons of active investing?

• What are the pros and cons of passive investing?

• What is the benefit to a hybrid approach to investing?

• How can I create impact within a hybrid portfolio?

If so, I’ve got you covered. 

Keep reading for the 5 ESSENTIAL things you need to know about active versus passive investing, and how an inheritance financial advisor can help you navigate your path forward. 

I’m Katherine. I’m a CFP® and a financial advisor for inheritance.

I’m here to help you through this journey, whatever your needs are. 

If you’re trying to get up to speed, check out the 20 Terms Inheritors Need to Know or How to Talk to Your Parents About Their End-of-Life or Estate Plan. 

And if you’re deep in the weeds and don’t know what to do next, schedule a FREE consultation to see how I can help you build a plan to understand, manage, and grow your inherited wealth.

We're about to get real about your money, your future, and why the investing world isn't always what it seems.

1.lWhat’s the difference between active and passive investing? 

Before we dive into all the details, lets start with some definitions:

Active Investing

Active investors try to beat the market by picking individual stocks, timing the market, or choosing fund managers who claim they can do these things. 

It's flashy, it's exciting, and it's what many people think of when they imagine "investing."

Passive Investing

This is the "slow and steady wins the race" method.  Passive investors buy and hold a diverse mix of investments that track a market index, like the S&P 500. It's less glamorous, but (spoiler alert) often more effective.

I know what you’re thinking:

I’ve got tens of millions of dollars, it seems like I should be doing something “active” with it. 

Hold that thought, because I’m about to challenge everything you thought you knew about investing. 

Active versus Passive Investing for Gen X, Millennial, and Gen Z Inheritors 

Keep reading to get educated about the differences between active and passive investing and which feels like the right choice for your inheritance.

2. What are the pros and cons of active investing?

Let's be honest: active investing sounds sexy. 

The idea of outsmarting the market, making bold moves, and potentially striking it rich is appealing, especially when you're young and thinking about growing a multi-million dollar inheritance over the next several decades. 

Active investing has some inherent factors that make it seem exciting and appealing:

The "Genius" Narrative

We've all heard stories of investors who made millions by picking the right stocks at the right time. It feeds into our desire to take advantage of once-in-a-lifetime opportunities to strike it rich. 

The Illusion of Control

Active investing gives the illusion of having control over how an investment portfolio performs, with decisions made in response to specific market conditions. 

The Entertainment Factor

Active investing can satisfy the need for excitement that many investors crave. It's like gambling with a veneer of respectability.

The Promise of Outperformance

Active managers promise to beat the market. Sometimes, they do. 

But here's the kicker:

Study after study has shown that, over the long term, the vast majority of active managers fail to outperform their benchmark indexes. 

According to the 2024 S&P Indices Versus Active (SPIVA) scorecard, over a 20-year period, almost 90% of large-cap funds underperformed the S&P 500.

So why do some people still argue so hard for the benefits of active investing?

Two words: human nature. 

We're hardwired to believe we can outsmart the system (and supercomputers) even when the evidence suggests otherwise.

3. What are the pros and cons of passive investing?

Passive investing is not glamorous. 

It doesn't make for good cocktail party conversation. 

But for many inheritors, it's the best choice choice.

Here's why:

Lower Fees

Passive funds typically have much lower fees than active funds. Over time, these savings compound, making a huge difference in your returns.

Better Average Performance

Passive investing has been shown to outperform active strategies over the long term. It's not about hitting home runs; it's about staying in the game and consistently getting on base.

Simplicity

Passive investing is easier to understand and implement. You don't need to constantly watch the market or worry about making the wrong move.

Tax Efficiency

Because passive funds trade less and are often set up as ETFs, they tend to be more tax-efficient, meaning more money in your pocket.

Reduced Emotional Stress

Passive investors are less likely to make rash decisions based on market fluctuations. The "set it and forget it" approach can help you sleep better at night.

Transparency 

Passive investing is straightforward – you know exactly what you're investing in and why. You don’t need to sit through a sales pitch to understand the “incredible value” of an investment opportunity. 

The biggest con of passive investing is that you give up the opportunity to “beat the market.” 

In my mind, this is an unfulfilled promise of active investing and not a factor on which decisions should be made. 

4. Investing with Sunnybranch: what are the benefits of a hybrid approach?

At Sunnybranch, I often recommend a hybrid approach between active and passive investing.

I do this with my clients in two primary ways:

Passive Portfolio with an Active “Sleeve” Strategy

We keep 85-90% of your portfolio in passive investments while using the remaining 10-15% for impact-focused active strategies.

Direct Indexing

Direct indexing is a customized passive investing strategy that allows you to own individual stocks in an index, giving you more control over tax-loss harvesting and ESG screening.

This hybrid approach allows Sunnybranch clients to build in elements of an active strategy that align with their values, priorities, and long-term goals without putting the bulk of their portfolio into high-cost strategies. 

The hybrid approach also recognizes the reality that inheriting wealth is emotionally and mentally draining. 

The pressure to "do something" with your inheritance can be overwhelming.

Under this pressure, the simplicity of passive investing allows you to make smart financial decisions without adding unnecessary stress or complexity to your life. 

You don’t know how the market will perform, but you do know that whatever it does your investments will be in line with what it does. You don’t need to worry about your portfolio zigging when the market is zagging. 

5. How can I create impact within a hybrid portfolio?

A focus on passive investing with an active “sleeve” can support inheritors looking to create positive impact with family wealth. 

Here’s how: 

ESG Index Funds

Many passive funds track indices that promote companies with strong track records for their environmental, social, and governance practices. Investing in passive ETFs that track these ESG indices is an important initial step for inheritors looking to create positive impact with their wealth.

Shareholder Activism

Large index funds have significant voting power in companies. By choosing passive funds that actively work to pass corporate resolutions focused on environmental, social, and governmental concerns, you can play a role in directly influencing the behavior of large public companies.

Freeing Up Resources

Instead of paying 1% to an active manager who have a more focused mandate, many inheritors prefer to use passive funds and take 1 - 1.5% annually from their portfolio to redistribute towards organizations aligned with their chosen impact thesis. 

Here's the bottom line about active versus passive investing for younger inheritors:

As a Gen X, Millennial or Gen Z inheritor, you have an incredible privilege and unique opportunity to shape your financial future and positively impact the world. 

Don’t fall victim to advisors who promote an “all or nothing” approach to active versus passive strategies. 

Both can have a role in your portfolio. 

You should focus on working with an inheritance financial advisor who can help you understand the pros and cons of each option and build a portfolio that aligns with your values, needs, and goals for the future. 

Your goal shouldn’t be to beat the market or to impress people at parties with your investing prowess. 

You should be focused on using your wealth to build a life full of community, joy, and ease. 

Let’s take the next step together

Understanding how to invest your inheritance is not easy. Inheritors can encounter a wide variety of different situations requiring knowledge and finesse to manage. If you need more help, you can download The 20 Inheritance Terms You Need to Know, or reach out to Katherine Fox, CFP® and CAP®, a fiduciary, fee-only financial planner to learn how Sunnybranch can help you build a portfolio strategy that aligns your values, priorities, and long-term goals.