Active vs. Passive Investing
Our investment strategy combines the advantages of both investment styles into one portfolio.Many articles have been written discussing the pros and cons of each of these investment strategies. Each camp believes that their strategy is the best over the long run. Let’s take a look at each and how they are used in the Bulging Wallet Portfolios.
- Active management is simply an attempt to “out perform” the market as compared to an index or benchmark. This could be the S & P 500, Russell 2000 or the MSCI/EFAE index.
Prevailing market trends, the economy, political and other current events, and company-specific factors all affect an active manager’s decisions. The aim of the active fund manager is to take this all into consideration and apply it to the choices made in the portfolio in order to beat the index for a particular fund.
- Passive management is basically called “indexing.” Here the investment approach is to mirror the index by owning the same securities, in the same proportions, as the index.
The management style is considered passive because the managers do not make decisions about which securities to buy or sell: they just “copy” the holdings of the index.
Which one works best?
That is a never-ending debate. Both sides have good arguments for their viewpoints and see the world of investing in two different lights.
Passive managers generally believe that it is difficult to beat the market. Thus they essentially offer performance that closely mirrors an index for those investing who are unwilling to assume the risk of active management.
Active managers, on the other hand, believe that the market can be beaten. While they may not be able to beat it all the time, they do believe that certain irregularities in the market allow them to achieve potentially higher returns.
The Bulging Wallet Approach
Our investment strategy combines the advantages of both investment styles into one portfolio. The passive holdings allow the market to perform with the index, but it is the actively managed securities that give the portfolio its horsepower. The potential for higher returns while controlling the risks of active management.
Source: Russell Investments and SEC
Source: Russell Investments and SEC
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