Active vs Passive: How to Help Your Kids Invest

Summary

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Merryn Talks Money

Episode Title: Active vs Passive: How to Help Your Kids Invest
Host: Merryn Somerset Webb
Guest: John Stepek (Senior Reporter, author of Money Distilled)
Date: April 1, 2026

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Episode Overview

This episode tackles a perennial investing debate: Is it better to invest actively by picking funds, ETFs, and trusts, or to keep it simple with passive, low-cost global index trackers? Merryn Somerset Webb and John Stepek respond to a listener question—specifically, how to advise younger investors (like your children) when making these decisions, given their long time horizons. Using real data and lively discussion, they dig into long-term performance, the limitations and hidden risks of both strategies, and some practical guidance on finding the right approach.

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Key Discussion Points & Insights

1. Listener Question: Active vs Passive for the Next Generation

• [03:36] The questioner, Robert, asks if it's worth trying to pick a "mixed bag" of active funds, ETFs, and investment trusts or whether it's simply better to put everything into a global tracker (like a Vanguard world tracker).
• Host Commentary: Merryn and John wish for more detail around what constitutes a "mixed bag," but agree the core question is one of ongoing relevance: Is active management worth it vs. being passive?

Notable Quote

"Basically, it's saying, is there any point in investing actively when you can just buy passively and be done with the whole thing?"
—Merryn Somerset Webb [03:31]

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2. Historical Performance: What the Data Says

• [03:43–06:19] John provides hard numbers:

  • MSCI World Index (global equities): ~9% annual return in sterling over the last 40 years (since 1987).
  • Scottish Mortgage Investment Trust: Nearly 13% a year since 1989, outperforming the benchmark during some periods.
  • Berkshire Hathaway (Warren Buffett): 16.5% annually since 1987.

• Context and Caution:

  • Outperformance by specific active funds is real but unusual; success is uneven and often tied to exceptional managers or particular eras.
  • "Beating 9% a year through active management would have been a challenge... it's quite a high hurdle."
    —John Stepek [06:08]

• Practical Investment Choices:

  • Most investors would not have been comfortable putting all their money in a single trust or company—even famous winners.

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3. The Hidden Risks of Passive Investing

• [06:19–07:54] Merryn highlights issues with “just” buying a global tracker:

  • Hidden Momentum: Indexed investors unintentionally become momentum investors, overweighting whatever is currently dominant (now: US tech).
  • Concentration Risk: The MSCI World is now 61% US (compared to 30% in 1987); Japan has fallen from 40% to 5%.
  • Structural Change Considerations: We may be at the start of a "great rotation"—the dominance of US tech could fade.

• Even Going Passive Is an Active Choice

  • "Everything is active. Everything is active. And even going fully passive is an active decision to be a US tech heavy momentum investor."
    —Merryn Somerset Webb [07:56]

  • Alternative Approaches: Equal-weighted global trackers as a less momentum-driven version of “passive” (often harder to buy).

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4. Asset Allocation: The Underestimated Active Decision

• [08:50–10:24]

  • John reiterates that even passive investors are making allocation choices: by geography, sector, and weight.

  • He suggests using the global tracker as a “reference point,” then deciding on your own tilts (e.g., more UK stocks, emerging markets, specific sectors).

  • Notable Quote:

    "If I think I can beat this, what would I do differently to the global tracker?"
    —John Stepek [09:25]

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Memorable Moments & Quotes

• On the mirage of pure passivity:

  “There is no such thing as a passive combination of passive trackers.”
  —Merryn Somerset Webb [07:52]

• On generational investing:

  “I don’t think any sensible investor would have put 100%…into Scottish Mortgage Trust in 1989. ...I don’t think most people would have thought like that.”
  —John Stepek [05:29]

• On allocation drift:

  “In 1987, [the global tracker] had about 30%...in the US and now it’s 61%. Whereas...[in] the late 1980s it had actually about 40% in Japan and now that’s down to just over 5%.”
  —John Stepek [08:56]

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Practical Takeaways

• For parents/advisors: There is rarely a clear winner between “active” and “passive”—both involve choices and risks. Simplicity and diversification are virtues, but don’t assume passivity is risk-free or “neutral.”
• For young investors: Be aware of concentration risks in global trackers; consider if you want to deviate from market weights and why.
• On performance: While standout managers (Buffett, specific trusts) exist, they’re rare and often only apparent in retrospect.
• On future returns: Past outperformance from US tech-heavy indices may not persist.

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Segment Timestamps

• 03:36 — Listener question introduced
• 03:43–06:19 — John discusses historical returns and challenges active management faces
• 06:19–07:54 — Merryn explores the risks and hidden choices in “passive” investing
• 07:54–10:24 — Discussion on asset allocation and how all investing is, ultimately, active
• 10:24–end — Wrap-up: recognizing the complexity, inviting more listener questions

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Tone & Style Notes

• Relaxed and conversational, with frequent gentle humor and irony about the complexity (and possible futility) of investing debates.
• Both hosts blend practical data with skepticism about simple answers in finance.

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Final Thought

This episode underscores that every investment approach—active or passive—has its trade-offs, and even the most “set-and-forget” strategies involve active decisions. The best advice for young investors? Know what you own, understand the risks, and don’t chase certainty in an uncertain market.

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Notable Quotes Recap

• Merryn Somerset Webb: "Everything is active. And even going fully passive is an active decision to be a US tech heavy momentum investor." [07:56]
• John Stepek: "Beating 9% a year through active management would have been a challenge, I think, over the last 40 years. Which is not to say that passive is definitely going to do better over the next 40, but it’s quite a high hurdle." [06:08]

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Transcript

[Marin Thumbsetweb]

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[Marin Thumbsetweb]

Bloomberg Audio Studios Podcasts Radio News. Welcome to marantalks yous Money, the personal finance edition of marantalks Money and these bonus podcasts. We talk about the best strategies for making the most of your money. I'm Marin thumbsetweb and with me as ever, senior reporter and Money Distilled author John Stepk.

[John Stepk]

Hey Jon on hi Mil.

[Marin Thumbsetweb]

Now we are very lucky. Our very kind listeners do keep sending in questions and so we have one we want to answer today and do keep sending them in. The only thing I would say about this question is it is an excellent question. I don't want you to think for one second that it is not an excellent question, but it'd be easier for us to answer with a little more detail and you will see that as I read it out. Okay, so here. Here we go. Dear Marin, Very much enjoy your excellent podcast. Thank you very much Robert. The letter comes from Robert as As everyone knows, the more you flatter us, the more likely you are to have your question answered. And that's exactly the way it should be. So anyway, very much enjoy your excellent podcast and I have a question that may be of interest to discuss. It is much discussion over which fund and which market to invest in. But what is the actual data say from the last 40 years of picking a mixed bag of funds in ETFs and investment trusts versus just putting it all in a low cost Vanguard World tracker or a combination of Pat Massive trackers? Now you'll see that what I mean by a little more detail. What do we mean by a mixed bag of funds and ETFs and investment trust? I mean, is that a random mixed bag? And if you have a big enough mixed bag, then in the end it's going to pretty much hedge towards the performance of a tracker anyway. So it's difficult to look at that and come up with, with a, with a clear answer. If you'd turn something in with specific funds or a specific type of fund or investment trust them, it would be easier to be clear. But nonetheless the question remains valid. So onwards. So much discussion on which fund to purchase. But maybe it simply isn't necessary as fund managers only ever outperform for a few years. If you could send all your hate mail on that directly to John, so I don't have to deal with that. Fund managers, thank you very much. More from Robert. I'm an avid investor and I'm trying to advise my children and as their timelines are longer, I want to give them good advice. Thank you from Robert. So it is a great question. Basically it's saying, is there any point in investing actively when you can just buy passively and be done with, with the whole thing? Now, John, what's the answer?

[John Stepk]

I mean, it's a really good question.

[Marin Thumbsetweb]

Yeah.

[John Stepk]

So Robert sort of was asking about the last 40 years, so I pulled up the Bloomberg terminal, which is very helpful for these things.

[Marin Thumbsetweb]

Super helpful.

[John Stepk]

Everyone should have one because I tend to think about asset allocation in like four parts. So like bonds, cash, gold and equities. Right. But if you're talking about a young person. Yeah, and we're also talking about. Let's just assume that your gold's going to be static, your bonds are going to be broadly static. Ish. And your cash will be static. Ish. So let's just focus on equities for this. So if you go back to 1987, because I couldn't quite get back to 86, but that's like pretty much 40 years. So the MSCI World Index, the one that includes emerging markets and talking about sterling terms, it's returned roughly 9% a year in sterling over the last 40 years. And let's park inflation because that's not relevant to the discussion. We're just talking about in nominal terms. That's what you would have had to have beaten with a mixed portfolio that you chose yourself to beat the Global Equity index tracker. Well, actually, let's look at a couple of good comparators. If you bought Scottish Mortgage Investment Trust in 1989, which is when it kind of came out. You'd have done almost 13% a year for about 8.5% for the tracker over that period.

[Marin Thumbsetweb]

Although they would be clear, have also been bad times to buy a Scottish mortgage.

[John Stepk]

Oh, God, yeah. And if you'd done, if you'd bought, I mean, the best investor in the world, or, you know, the acknowledged best investor in the world, Warren Buffett, if you'd bought BERKSHIRE HATHAWAY In 1987, you'd have managed 16 and a half percent a year, which is obviously a lot more than 9%. I mean, that's pretty, pretty tasty. But I think your basic problem here is the. So many other things. I mean, like, for example, I don't think. I think someone could conceivably have put all of their equity money into Berkshire Hathaway and not felt uncomfortable about that in 1987 because Warren Buffett already had this amazing reputation. I certainly don't think any sensible investor would have put 100% of their equity allocation into Scottish Mortgage Trust in 1989. I can see that might have happened when it hit big and people might have thought, oh, you know, James Anderson, etcetera, Is like, you know, the best finance manager in the world. I'm going to put. But I don't, I don't think that would be advisable and I don't think most people would have thought like that. So I guess I'm making the point that beating 9% a year through active management would have been a challenge, I think, over the last 40 years. Which is not to say that passive is definitely going to do better over the next 40, but it's quite a high huddle.

[Marin Thumbsetweb]

It certainly is. And the only thing I would say about that is if you're just buying, you know, one passive fund and you're buying global index, there's a lot going on there that we've talked about a lot the last few years is that first, you're effectively a momentum investor. You didn't mean to be, but you are. That's worked very well for a period of time, but it won't necessarily keep working. You're also very overexposed to the US and you're very overexposed to the technology sector in the US in particular. And again, maybe that's fine and it's been fine for a while, but one of the things that everybody talks about on the part, and John, you write about and I read right about, is this idea that we are now in the, at the beginning, in the Foothills of a great rotation away from tech, probably away from the US being the biggest and greatest market everywhere. Not that, not that it'll stop being great, but that it might stop being less great relative to its competitors. So it may be that that style of passive effect momentum investing doesn't work quite as well over the next 20, 30 years as it has over the previous. And the other thing says if you're not doing that, I. E. You're not being a simple one stop shop passive investor using a global index ETF like that. There is no such thing as passive investing. Yes, you have to choose your ETFs, you have to choose your markets, you still have to do your own asset allocation and once you're doing that you're already into the whole world of, of of active. There is no such thing. Well, there is a, there is a combination of passive trackers, but there's no such thing as a passive combination of passive trackers. Right?

[John Stepk]

Yeah, exactly, yeah.

[Marin Thumbsetweb]

Everything is active. Everything is active. And even going fully passive is an active decision to be a US tech heavy momentum investor. Yeah, that's been a great decision for a long time. Will it still be a great decision? This is why this, this question is kind of, it's fairly unanswerable. It's fairly unanswerable. And one thing you can do is to not go into a market cap tracker where you've got more in the biggest companies, so you are very much a momentum investor and go into an equal weighted tracker, not nearly so easy to get by the way, whereby you're not a momentum investor because you hold each, each constitute of the index in equal weight. So it's a different way to do passive and it's a non momentum way to do passive because your holdings are constant being rebalanced that you are effectively a passive value investor. Yeah.

[John Stepk]

And I think the other thing that's useful because you're absolutely right about the asset allocation side of things because I was looking at again the global index tracker we were just talking about. So in 1987 it had about 30% of its assets in the US and now it's 61%. Whereas in 19, kind of the late 1980s it had actually about 40% in Japan and now that's down just over 5%. So I think one starting point, if you were turning around just now and saying well do I want to go fully passive? Do I want to go slightly more active? You could look at the allocation or the global allocation and perhaps also the sector allocation that the global tracker has got and then figure out how am I going to be different to that as a starting point, what is it about this? If I think I can beat this, what would I do differently to the global tracker? Should I have more in, for example, UK stocks? Should I have 20% instead of 3%? Should that boost my exposure to specific emerging markets, perhaps emerging markets that exclude China or, you know, that sort of thing? And should I maybe have a quarter in my portfolio in the US Rather than the full thing? And then again within that you can turn around and say, right, well, which of these should be equal weighted and which should be kind of momentum or, you know, sort of market cap weighted. So I think it's a useful reference point to at least know what the global tracker looks like.

[Marin Thumbsetweb]

Yeah, yeah, yeah. Okay. Okay. Lots to think about that. I think that's probably enough before instead of answering the question, we make everybody even more confused. But I suspect this is something that we'll come back to because John and I talk a lot about passive investing, active investing, which way you want to go and how each one fits the environment around it. So more to come on that definitely. Robert, thank you so much for your question. It was a great question. And other listeners, please do send in your questions. Remember the flattery at the beginning if you want them answered. Thanks for listening to this week's Maryn Talks yous Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter erinsw and johnstepek. This episode was produced by Samizadi and Moses andam questions and comments on this show and all our shows are always welcome. Our show email is merinmoneylumberg.net.