Active vs. Passive

Active vs. Passive

In portfolio management, there are two basic paths of management an investor follows:  active management and passive management. 

Active investment management uses research and analysis to select investments that the investor believes will out perform the general market.  In contrast, the goal of passive management is to achieve market returns.  All the research and analysis in active investment management comes at a cost; usually higher turnover in the portfolio, potentially generating higher trading costs, commissions and taxes.  The active manager must overcome the additional costs in portfolio return.  The question becomes: is the potential for additional gain over a passive strategy worth the near-certainty of additional cost. 

Passive investing seeks to take some of the prognostication out of the selection process, as well as the potential of emotional decision making.  When decisions are based on subjective information, it is easy to get caught up in the next great thing.  Ignoring the hype in favor of a disciplined buy-and-hold tactic, may keep your portfolio on track. 

Passive investment management does not mean buy-and-ignore.  Your portfolio will need to be rebalanced periodically – selling the asset classes that are performing better than expected and buying the asset classes which have lagged.  By following this disciplined approach, you are in essence, buying low and selling high.