Active management is an investment strategy where the fund manager tries to achieve returns that outperform a specific benchmark index. Passive management has an investor or fund manager trying to match the returns of a specific benchmark index, often by buying into highly diversified mutual funds or index matching exchange-traded funds (ETF).
Is Active Portfolio Management Better Than Passive Management?
Active financial management generally means more frequent buying and selling of assets in order to generate higher returns, or more concentration in certain holdings. This can be beneficial if done correctly, but also carries with it greater risks. Passive financial management generally means holding assets for longer periods of time and waiting for them to appreciate in value. This approach is often less risky, but may also result in lower returns. The best approach for any individual will depend on their goals, risk tolerance, and other factors.
What Are Some Characteristics of Active Portfolio Management?
Active portfolio management generally comes with higher fees and expenses, as well as greater risks. Additionally, it can be time-consuming and require a great deal of research and analysis. For these reasons, some individuals may prefer to use a passive approach to managing their finances.
What Are Some Characteristics of Passive Portfolio Management?
While passive portfolio management generally has lower fees and expenses, it can also lead to lower returns. Additionally, it may take longer to achieve financial goals using this approach.
The Winning Strategy
People can attain financial independence, and sometimes very quickly, by saving large amounts and investing them with a passive strategy. The Dow Jones index has returned 263% between November 2002 and November 2022, and the S&P 500 has returned 326% over the same period – a little over 7.5% CAGR.
Someone outperforming the S&P by 2.5% consistently with an active strategy and doing 10% CAGR returns every year would have returned a whooping 573% over the same period.
Whether or not you should actively manage your investments or let them ride depends on your individual goals and risk tolerance. If you’re more hands-on, and willing to build the competence, then you may want to actively manage your portfolio; however, if you’re more comfortable with less involvement, then a passive approach may be better suited for you.
Source: Yahoo Finance
