Active Management 101
What is Active Management?
What is Active Management?Active investment management is not about exceeding a specific benchmark or “beating the market.” Active management seeks favorable risk-adjusted returns in any market environment, generally employing sophisticated algorithms and models to capture gains and protect against losses in a wide variety of sectors, asset classes, and geographies. It is about controlling risk in the markets, finding new ways to dynamically diversify, and smoothing out the long-term volatility typically found in any asset class. Active managers tend to rely on quantitative approaches for asset allocation, exposure to the market, and adjustments to portfolios based on current market conditions. When it comes to evaluating returns, they generally will not compare to the S&P 500 or global total market indexes, but are far more interested in risk-adjusted returns and in meeting their portfolio objectives. In theory, it is fundamentally about a long-term approach to portfolio management that is diametrically opposed to “buy-and-hold.”
Fee-based revenues/assets growing among advisors
Source: PriceMetrix, “The State of Retail Wealth Management 2017,” May 2018.
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5 reasons to consider active management
Buy-and-hold is dead(ly)
While bull market runs are impressive, history shows it is not a matter of “if” but more a matter of “when” for the next bear market. Investment expert Kenneth Solow sums it up: “Patiently waiting for stocks to deliver historical average returns does not rise to the level of an investment strategy.”
Does “set it and forget it” really make sense?
For retirees or those approaching it, the “sequence of returns” dilemma can have a devastating effect on future income needs. Active management offers a prudent path to achieving the twin goals of asset preservation and compounded capital growth.
As one prominent active manager has said, “No one would ever jump into a car without brakes, so why would investors even consider having an investment strategy that did not have a strong defense?”
Behavioral finance studies have documented the tendencies of investors to operate on the destructive principles of “fear and greed.” Disciplined active management takes emotion out of the equation.