# The era of passive investing is waning and what this means for you
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2020-10-15
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: How to Beat the 'Black Box' Investing Trend and Take Control of Your Finances
Meta Description: Learn why relying solely on robo-advisors for investing may not be the best approach in the changing landscape of Fintech. Take control of your investments
URL: https://financedigest.com/the-era-of-passive-investing-is-waning-and-what-this-means-for-youhtml

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_By **Oleg Giberstein,** Coinrule_

When discussing Fintech with bankers in the City of London it is not unusual to hear: “Normal people should not be trading.” This fits a narrative that has become widely accepted: ‘normal’ people are simply not up to making money by investing. They should play safe by putting their funds into a so-called robo-advisor like Wealthify or Nutmeg which will put their hard-earned cash into index-tracking passive investment funds.

This type of investing is often referred to as ‘black box’ investing is a very bad idea. Black box [investing involves a computer using complicated formulas to achieve returns in the desired way](https://www.financedigest.com/10-ways-to-put-together-a-killer-investment-pitch.html "10 WAYS TO PUT TOGETHER A KILLER INVESTMENT PITCH"). However, because an investor may not understand the model (and may not be able to do so), it can lead to unforeseen problems that the investor is unable to react to or even mitigate against. This [investment approach also goes against the Fintech trends](https://www.financedigest.com/top-5-investment-trends-to-watch-this-summer.html "Top 5 Investment Trends to Watch this Summer") that are beginning to unfold. It looks backwards to a time when investing was for the elite. However, this is no longer the case.

**How can the everyday, non-professional investor get the most out of the markets? Here are some ideas:**

- _Robo-advisors_

Robo-advisors are a class of financial advisers. They provide financial advice or [investment management](https://www.financedigest.com/mg-appoints-former-head-of-axa-investment-managers-andrea-rossi-as-new-ceo.html "M&G appoints former head of AXA Investment Managers Andrea Rossi as new CEO") online with moderate to minimal intervention from a human being. They [provide digital](https://www.financedigest.com/digital-banking-traditional-banks-vs-fintech-providers.html "Digital banking: Traditional banks vs. fintech providers") financial advice based on mathematical rules or algorithms only. Robo-advisors, despite their automated nature, still charge a management fee, often as much as 1% of your funds. That’s £500 on a £50,000 portfolio, per year.

But that’s not all. The ‘passive-investing is great’ mantra has been sung repeatedly over the past 10 years. And it’s worked – as all the markets have been going up. Everyone’s a genius in a bull market. But this won’t go on forever. Remember Michael Burry? The ultra-nerd [Hedge Fund](https://www.financedigest.com/what-is-a-hedge-fund.html "What Is A Hedge Fund") manager in “The Big Short” had predicted the Subprime Mortgage crisis that led to the financial crisis of 2008/09. [He is now warning that Index Funds are the next massive bubble](https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos).

_For you:_

With just a little bit of research, anyone can create their own long-term, low-cost multi-asset fund held via a platform, with total costs of below 0.5%. Explore platforms like eToro or IG Index to either buy an index [fund that holds a range of stocks directly or create](https://www.financedigest.com/carta-teams-up-with-vauban-to-launch-the-first-digital-solution-aimed-at-venture-capital-investors-creating-luxembourg-based-funds.html "Carta teams up with Vauban to launch the first digital solution aimed at venture capital investors creating Luxembourg-based funds") your own.

In order to spread your risk, [pick a range of stocks from different industries](https://www.financedigest.com/airless-pump-market-to-grow-by-1-8x-as-demand-in-personal-care-cosmetics-industry-picks-up-pace-future-market-insights.html "Airless Pump Market to Grow by 1.8x as Demand in Personal Care & Cosmetics Industry Picks Up Pace: Future Market Insights") and decide what percentage of your portfolio you want to allocate. If that percentage becomes higher or lower over time, you can buy or sell respectively to balance it out. Do it once per month and save on the fees of robo-advisors.

- _The trend-of-the-day_

When the dotcom Bubble of 2000 collapsed, it took the [market over 17 years](https://www.financedigest.com/puma-confirms-full-year-outlook-flags-market-volatility.html "Puma confirms full-year outlook, flags market volatility") to recover. Who had been left holding worthless stocks? Mostly the [retail investors](https://www.financedigest.com/analysis-european-retailers-are-on-investors-naughty-lists-this-christmas.html "Analysis-European retailers are on investors’ naughty lists this Christmas") who had been lured into buying the ‘trend-of-the-day’. The trend-of-the-day today is [passive investing](https://www.financedigest.com/8-best-passive-investing-ideas-which-can-help-you-make-money-in-2022.html "8 Best Passive Investing Ideas Which Can Help You Make Money In 2022") into index funds.

For too long, normal people have been [pushed into seemingly ‘risk-free’ investments that end up destroying their financial wealth in a crisis but which lack the potential for huge](https://www.financedigest.com/investors-flee-uk-bonds-pushing-gilts-to-huge-monthly-loss.html "Investors flee UK bonds, pushing gilts to huge monthly loss") gains.

_For you:_

A modern-day [investor does not have to run complex strategies to beat](https://www.financedigest.com/aviva-boosts-investor-payouts-after-profit-beat.html "Aviva boosts investor payouts after profit beat") the ‘trend of the day’. I personally keep most of my funds in safe, liquid assets but I have about 20% of my portfolio invested in high-risk high-reward assets, like certain tech stocks or cryptocurrencies. This is called a ‘Barbell strategy’ and has become better known in the mainstream thanks to famous author, professor and trader Nassib Taleb, author of ‘Black Swan’.

Most of us panic if our funds are sitting in cash on a 0.1% rate [savings account](https://www.financedigest.com/digitised-prize-linked-savings-accounts-how-it-can-encourage-better-financial-habits.html "Digitised prize-linked savings accounts: How it can encourage better financial habits"). But having the majority of your money in cash, gold or bonds, means that you are well protected from risk. And you can buy when everyone else is panic-selling during a market crash because you have cash available. The famous mantra “buy when there is blood on the streets” has allowed many famous investors, such as Warren Buffet, to [build a top-class stock portfolio](https://www.financedigest.com/building-a-portfolio-for-retirement.html "Building A Portfolio For Retirement") at a great price.

- _Advanced trading tools_

In normal times robo-advisors give you [average annual](https://www.financedigest.com/average-annual-uk-grocery-bill-highest-since-at-least-2008-industry-data.html "Average annual UK grocery bill highest since at least 2008 -industry data") returns. But when all hell breaks loose, as it inevitably will, sooner or later, I would not want to be sitting in an index fund when everybody is trying exit through the door simultaneously.

Those who went ‘through the door’ before others won’t be the ones suffering. The smart Hedge Fund manager who long ago secured his investment position by buying insurance or setting up stop losses that will sell down his holdings in the event of a crash is able to react to market [changes quickly](https://www.financedigest.com/seeking-right-tone-new-uk-pm-truss-had-to-quickly-change-gear-for-queen.html "Seeking right tone, new UK PM Truss had to quickly change gear for queen"). John Paulson, the famous investor, [posted profits](https://www.financedigest.com/uber-could-post-first-adjusted-profit-this-quarter-as-ride-demand-returns.html "Uber could post first adjusted profit this quarter as ride demand returns") of over $2bn during the 2008 Financial Crisis.

_For you:_

Small time amateur [investors tend to avoid anything more complex than simply buying and selling](https://www.financedigest.com/global-share-sell-off-pauses-in-asia-as-investors-await-fed-policy-update.html "Global share sell off pauses in Asia as investors await Fed policy update"). By doing so they miss out on major [market opportunities](https://www.financedigest.com/automotive-fuel-filter-market-opportunity-analysis-and-industry-forecast-up-to-2031.html "Automotive Fuel Filter Market: Opportunity Analysis and Industry Forecast up to 2031"). A simple ‘Put’ option can act as an insurance that allows the trader to [sell a certain financial asset at a predetermined price:](https://www.financedigest.com/stocks-jump-as-treasury-yields-ease-and-oil-prices-sell-off.html "Stocks jump as Treasury yields ease and oil prices sell off") perfect when you want to protect yourself against a market crash.

Moreover, automated trading rules allow hobby [investors](https://www.financedigest.com/how-to-begin-investor-trading-in-australia.html "How to begin investor trading in Australia") to trade like professionals with algorithms. Platforms like Coinrule give normal people the tools to [build strategies that protect against losses and help to catch market opportunities](https://www.financedigest.com/prefabricated-building-system-markets-advanced-research-growth-opportunities-in-global-industry-by-2025-edited-by-leading-research-firm.html "Prefabricated Building System Market’s advanced Research & Growth Opportunities in Global Industry by 2025 Edited by Leading Research Firm"). By designing and then [automating the strategy you don’t need to sit in front of the computer all day or constantly watch the markets](https://www.financedigest.com/guide-to-the-most-affordable-marketing-automation-software.html "Guide To The Most Affordable Marketing Automation Software"). Innovation is starting to provide access to the markets for more and more people. And the professionals are hating it.

- _Do-It-Yourself Traders need to keep learning_

Trading and investing are tough to do. There is no doubt about that. For someone with less time and experience it certainly makes sense to act conservatively in the markets. However, that does not mean that regular people are too dumb to learn to make their own investment decisions. Today, professional traders can make money whether markets are up or down. Non-professionals can do the same.

There is no good reason why today’s [markets must remain esoteric to those outside the industry](https://www.financedigest.com/micronutrient-powders-market-industry-research-segmentation-key-players-analysis-and-forecast-to-2029.html "Micronutrient Powders Market Industry Research, Segmentation, Key Players Analysis and Forecast to 2029"). Behind scary, technical language are actually some simple concepts. Don’t listen to the bankers-in-suits claiming that ‘this is not for regular people’ but only for the ‘Masters of the Universe’.

Most of the problems [holding normal people back](https://www.financedigest.com/major-myths-and-questions-holding-banking-and-financial-services-back-from-full-digital-id-adoption.html "Major myths and questions holding banking and financial services back from full digital ID adoption") are related to access. Access to the right trading instruments, the right knowledge and the necessary experience. If you just put your money into a passive fund, you never learn and are forever victim to whatever crisis may hit the market.

_For you:_

Read and [study the markets](https://www.financedigest.com/global-market-study-on-battery-pack-for-marine-hybrid-full-electric-propulsion.html "Global Market Study on Battery Pack for Marine Hybrid & Full Electric Propulsion"). Books like “The Intelligent Investor” by Benjamin Graham, “What I Learned Losing a Million Dollars” by Paul and Moynihan and many others provide great introductions to the topic. Tools like TradingView make chart reading accessible for everyone. Free resources and communities allow normal people to get up to speed and learn quicker than ever. Other new entrants into this sphere are beginning to offer products that allow non-professionals to trade on easy-to-use platforms with a wide range of assets available. The days when you needed to navigate complex, confusing interfaces are truly over.

- _Make up your own mind_

Platforms like Robinhood, Revolut or Freetrade have been making an [impact in the retail online investing market](https://www.financedigest.com/railway-bearing-market-size-2021-key-manufacturers-industry-share-investment-opportunities-future-trends-market-impact-revenue-demand-and-analysis-by-forecast-2030.html "Railway Bearing Market Size 2021 Key Manufacturers, Industry Share, Investment Opportunities, Future Trends, Market Impact, Revenue, Demand and Analysis by Forecast 2030") by offering a smooth user experience, modern interfaces and great accessibility. But when it comes to financial [inclusion](https://www.financedigest.com/the-open-banking-revolution-enabling-accessible-and-inclusive-finance.html "The open banking revolution – enabling accessible and inclusive finance") they don’t go far enough. Famously, Robinhood sells on its user’s trading orders to be [executed](https://www.financedigest.com/planning-elaborately-to-ensure-quality-trade-executions.html "Planning elaborately to ensure quality trade executions") by high-frequency trading firms like Virtu or Citadel Securities. This puts these firms in a position to place their own [trades in such a way that regular people will often end](https://www.financedigest.com/global-stocks-trade-higher-at-the-end-of-a-volatile-month.html "Global stocks trade higher at the end of a volatile month") up overpaying. This is a [win for the trading](https://www.financedigest.com/allianz-trade-wins-global-banking-finance-reviews-best-trade-credit-insurance-company-asia-pacific-2022.html "Allianz Trade wins Global Banking & Finance Review’s Best Trade Credit Insurance Company Asia Pacific 2022") firms, but most definitely a loss for you.

On the other hand, despite years of talking about the ‘end’ of cryptocurrencies and the ‘scams’ in the market, everyday people are trading these products more than ever. The need for a market that, at least has the [potential for full](https://www.financedigest.com/embedded-finance-is-the-new-norm-in-banking-but-what-is-needed-to-unleash-its-full-potential.html "Embedded finance is the new ‘norm’ in banking, but what is needed to unleash its full potential? ") transparency, fast learning and large opportunities, is there. And it is being made a reality by new tech.

_For you:_

Spend time doing your own research and learn to make your own judgements. Just because a new [platform is hyped or a market](https://www.financedigest.com/cloud-communication-platform-market-2022-scope-of-current-and-future-industry-2030.html "Cloud Communication Platform Market 2022 | Scope of Current and Future Industry 2030") is attacked in mainstream perception does not make it more or less right. Use the platforms and tools that offer full transparency, have the ethics in place that you value and are accessible for normal people.

**In summary**

Of course trading and investing involves risk.  Rather than ignoring this fact take time to learn about [trading and also take personal responsibility for your finances](https://www.financedigest.com/trade-finance-the-small-brush-to-paint-the-big-picture.html "Trade Finance: The Small Brush to Paint the Big Picture").  It looks like normal people are starting to buy into this vision in ever larger numbers. And, I for one, think that’s wonderful. Opportunities abound for the non-professional – and they aren’t disappearing anytime soon.


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