As we had learned about the inner-workings of passive investing in the previous edition, we will now focus our attention on passive management’s counterpart, active investing (active management). Under this type of investment management, managers take a more proactive approach in effort to achieve optimal returns and to outperform the market.
What is active investing and how does it work? This investment strategy uses the human touch to actively manage an investment portfolio. Managers will utilize analytical research, forecasts, as well as their own investment experience, expertise and judgment in an effort to make the best possible investment decisions regarding what securities to buy, sell or hold. Active managers tend to believe that short-term price movements are significant and that these movements can often times be predicted. They are not bound by any single index fund’s performance potential and can deploy a multitude of strategies with the goal of outperforming an investment benchmark index. Some of the strategies used by active fund managers to construct their portfolios include risk arbitrage, short positions, option writing and asset allocation.
When it comes to investing, there is not one strategy that fits all. There are many different situations and circumstances that can call for different investment strategies, depending on the investor in question. It is important to make sure that as an investor you are vetting and determining which investments will best fit your particular situation, financial goals, needs, risk tolerance and time horizon. Where should you begin your search for the best investment for you? Most simplistically, investment strategies can be broken down into two specific categories; we know them as active investing (active management) and passive investing (passive management). In order for us to attain a better understanding of how each strategy functions, operates and performs over a longer period of time, we’re going to focus only on passive investing (management) in this article. In the next article, we will cover active investing and in the final of the three part series, we will compare passive investing versus active investing. With that, investors can discern the potential benefits and pitfalls between the two investment strategies prior to deploying such a strategy in their own investment portfolio.