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Active vs. Passive Portfolio Management


The "active" vs. "passive" debate has been raging on for quite a while now in the investment world. Proponents of the active approach believe that a skilled investment manager can add value to a client's portfolio by generating returns that outperform a benckmark index such as the S&P 500. Those that favor the passive approach contend that the best way to capture overall market returns is to simply invest in low-cost index investments that track the performance of the underlying index.

So who is right?

That's not an easy question to answer, and each side of the debate has strong advocates who argue that the advantages of its approach outweigh those of the other. Here are some of the advantages of each approach:

Active Portfolio Management

  • Ability to take advantage of market trends
  • Ability to shift investments to sectors that are outperforming the overall market
  • Tax-loss strategies to minimize capital gains taxes
Passive Portfolio Management
  • Generally lower cost than active management
  • Can be more tax efficient
Which should you choose?
 
As a financial planner, I have to responsibility of advising my clients on the investments in their portfolios. More often then not, we choose to use a blend of active and passive management, investing the "core" of a client's portfolio into a mix of passively managed ETFs, while investing the remaining portion in a mix of actively managed accounts that can include a wide variety of investment vehicles. This "core-satellite" approach allows us to create a fairly low cost investment solution that also provides the potential for our clients to achieve performance that could exceed a strictly passive approach.
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Comment   |  5 years, 8 months ago from La Verne, CA