One of the longest-standing investing debates is over the relative merits of active versus passive portfolio management.
With an actively managed portfolio, a manager tries to beat the performance of a given benchmark index by using his or her judgment in selecting individual securities and deciding when to buy and sell them. A passively managed portfolio attempts to match that benchmark performance, and, in the process, minimize expenses that can reduce an investor’s net return.
Proponents of active management believe that by picking the right investments, taking advantage of market trends and attempting to manage risk, a skilled investment manager can generate returns that outperform a benchmark index. For example, an active manager whose benchmark is the Standard & Poor’s 500 Index (S&P 500) might attempt to earn better-than-market returns by overweighting certain industries or individual securities, allocating more to those sectors than the index does.
An actively managed individual portfolio also permits its manager to take tax considerations into account. For example, a separately managed account can harvest capital losses to offset any capital gains realized by its owner, or time a sale to minimize any capital gains. An actively managed mutual fund can do the same on behalf of its collective shareholders.
However, an actively managed mutual fund’s investment objective will put some limits on its manager’s flexibility; for example, a fund may be required to maintain a certain percentage of its assets in a particular type of security.
Advocates of unmanaged, passive investing – sometimes referred to as indexing – have long argued that the best way to capture overall market returns is to use low-cost market-tracking index investments. This approach is based on the concept of the efficient market, which states that because all investors have access to all the necessary information about a company and its securities, it’s difficult if not impossible to gain an advantage over any other investor.
As new information becomes available, market prices adjust in response to reflect a security’s true value. That market efficiency, proponents say, means that reducing investment costs is the key to improving net returns. (Further reading: bei kryptoszene diese Anleitung)
Indexing does create certain cost efficiencies. Because the investment simply reflects an index, no research is required for securities selection. Also, because trading is relatively infrequent – passively managed portfolios typically buy or sell securities only when the index itself changes – trading costs often are lower. Also, infrequent trading typically generates fewer capital gains distributions, which means relative tax efficiency.
Determining the right management style for you can depend on several factors. It is important to consider your overall investment objective and personal risk tolerance when choosing an investment strategy. Any of our trust and investment professionals at Park National Bank are available if you ever would like to discuss the right strategy for you.
Mareion A. Royster is an assistant vice president and trust officer with Park National Bank and a financial advisor for Raymond James Financial Services. Mareion volunteers with multiple community organizations that support children, mental health and local development. He can be reached at email@example.com or 740-349-3956.
Found in The Newark Advocate May 20, 2017