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Integrate Active and Passive Management

5 Reasons Why So Many Investors Prefer Active Management

02/15/2019

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In recent years, passive investing has been growing in popularity among investors. People are attracted to the “buy and hold” strategy that goes with passive investing. However, despite this growing popularity, a lot of investors still prefer active management for their investment portfolio.
Why has active investing remained popular as passive investing grows? What attracts investors to this style of investing? In this article, we will explain why many investors still trust active management to deliver the investment results that they are looking for.

What is Active Management?

People have plenty of opinions and strategies when it comes to investing. However, everything pretty much boils down to two basic philosophies: active investment and passive investment.

Passive investment is a long-term, “buy and hold” style of investing. That means active investing is much more of an ongoing effort and research in order to take advantage of market trends and changes.

Passive investors try to track the market or certain sectors and grow as the market grows while active investors try to beat the performance of the market by making smart moves that will help them maximize their growth.

There is no right or wrong way to invest and choosing active management largely comes down to a personal preference.

So, why would someone make the choice to go with active management over passive investment? Here are some of the top reasons.

1. Trading Based on Market Conditions

People like to choose passive investing because it is very much a “set it and forget it” kind of strategy. Active management is designed to constantly search for opportunities in the market in order to make the most of every investment.

The downside to this strategy is that active management fees are typically higher than passive investment fees. However, if active portfolios achieve their goal of beating the market, the extra cost may be worth it.

Everyone knows that the markets will experience ups and downs. This is known as the economic cycle. Over time, despite the ups and downs, the markets will rise. Passive investors simply roll with the challenges while active management seeks to make the most of each stage of the economic cycle.

Active managers will seek to buy more stock when the market is low, and trade those stocks as the market rises. Staying mindful of what the markets are doing can make active management very successful.

2. Focus on Individual Securities

Active management doesn’t try to track an entire market or industry. Instead, active investors seek to beat the market by predicting winners and losers in the market. This means that active investors hold and trade individual stocks.

A successful active investor can make the most of this strategy by constantly finding undervalued stocks and trading off overvalued stocks to optimize their portfolio. In contrast, passive investors will often invest in exchange-traded funds that focus on an entire industry and hold a wide range of stocks. The high performing stocks and underperforming stocks end up providing balance.

3. Don’t Have to Give Up Diversification

One common myth in the investment world is that passive investing is the best way to diversify a portfolio. The truth is that passive and active management can provide equally diverse investment options.

An advantage that active management has over passive investing is that diversification can be tracked and adjusted regularly and quickly. If a single security is doing well and causing the target diversification percentages to change, active managers can make adjustments quickly. Passive investors typically rebalance less regularly and may miss out on important opportunities to diversify and rebalance quickly.

4. Mindful of Tax Considerations

Taxes are always on the mind of investors. Growing your investments only to give some back due to taxes is a good way to take the wind out of your sails. Active management can incur taxes due to the frequent trades. However, that’s not to say that active management is a poor choice for those who want to avoid a big tax bill.

Smart investment managers can plan their trades and decisions with taxes in mind to ensure that significant taxes are not incurred. If taxes are a concern, there is no need to avoid active management when investing. However, a plan has to be in place for taxes.

5. Better Performance than the Rest of the Market

The most common reason people are attracted to active management is the prospect of outperforming the market and maximizing their investment growth. After all, that’s why everyone invests, right? People want to see their hard work pay off and bring their financial goals closer whether that be retirement, college savings, or saving for a major purchase like a home.

Of course, it’s not guaranteed that active management will outperform the market. However, a good investment manager can maximize a portfolio when the economy is going well and reduce losses when the economy is experiencing a downturn. Over a long period of time, active managers that make the right decisions should be able to outperform the market and, in turn, passive investors. The down points in the market could even become opportunities for smart managers that have made the right moves.

Is Active Management Right For You?

The debate between active management and passive investing is one that will continue to rage on for years to come.

The truth is that there is no right or wrong answer that can be applied to every investor. Some investors may even use both strategies to build their complete portfolio.

How do you determine if active management is right for you? Will active management fit with your financial goals?

Many investors prefer active management for the increased performance, attention to details, and flexibility. Active managers can make the most of the good times and dampen the pain of economic downturns by making smart moves and looking for opportunity.

No matter what your financial goals are, how long your time frame is, or your stage of life, active management could help you make the most of your investments. If you are interested in learning more about active management, how it can fit in with your investment goals, and the potential advantages of choosing an active strategy, contact us at Linden Thomas and Company today.

Our nationally recognized team of wealth advisors can help you set goals and see your plan through to the end. If you’re ready to start building a stronger financial future, we are here to help.

DISCLOSURES

Linden Thomas and Company and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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