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Feb 19, 2021

What’s Better: Active or Passive Management?

Should you hire an active manager to oversee your assets? Or should you handle the investing yourself with ETFs and/or a ‘set-and-forget’ passive strategy?

The answer to this question is not definitive, and it really depends on what type of investor you are. It may also, interestingly, depend on when you’re trying to decide—more on that later.   

In this post, I’ll make the case for both approaches to investment management.

When You Should Favor Active Management

If you’re the type of investor who:

  • Wants alpha/outperformance;
  • Wants tactical management during downturns;
  • Tends to get emotional during volatile periods;
  • Wants a professional advisor you can talk to and work with…

Then active management is probably the right choice for you. But seeking out an active manager doesn’t mean you’ll always get those things—not all active managers are created equal.

A well-known academic study of a 20-year period from 1990 through 2009 looked at returns of active managers relative to their respective benchmarks, and found that net of fees the active managers underperformed by about 40 basis points per year. Interestingly, the study concluded that in periods when equity-market returns were 10% or higher, only about 30% of active managers outperformed their benchmarks.

So at this point, you may be thinking, why hire an active manager at all? Two reasons. First is that when the researchers looked closer, they found that truly active managers actually performed quite well. The most active 20% of managers, which the study called “diversified stock pickers,” outperformed their benchmarks by 126 basis points per year. The key takeaway here for investors is that active managers who actually trade regularly and have proven track records may be the ones to seek out.

 

 

The second reason is that active managers tend to thrive in tighter markets, when returns are subdued and there’s not much alpha out there to be had. In periods when market returns were under 10%, over 50% of active managers outperformed.

That’s why I mentioned earlier that it might matter when you’re asking about whether active is better than passive. In an environment when market returns looking forward are expected to be low – perhaps such as now given we’re nine years into the bull market and valuations are stretched – then active managers could deliver.

When You Should Favor Passive Management

If you’re the type of investor who:

  • Is truly focused on the long-term;
  • Has the patience to shrug off volatile swings and stay cool in difficult market environments;
  • Is fee sensitive;
  • Can keep your emotions in check;
  • Is ok performing in-line or slightly lower than the market…

Then passive investment is probably the right choice for you. With active management, there’s always a chance that the manager you hire will let you down, underperform the market, and mistime/mismanage a market downturn (or upturn). With passive management, your portfolio tracks the ups and downs of the market, and you participate in just about every price swing.

At its core, passive investment means purchasing an ETF that tracks an index, such as the S&P 500. For an investor who is truly passive, there is only one action item to take: purchase an ETF that tracks the index and never sell it. Over very long stretches of time (20+ years), the S&P 500 has proven to deliver attractive returns, the question is whether the passive investor can manage not to abandon the strategy in the heat of a bear market. That’s where “patience” and keeping emotions in check is critical.

Are You an Active or Passive Investor?

In reality, most investors are active investors. We have too much desire to outperform and are driven all too often by new investment ideas and attractive trades. It’s human nature. Perhaps the key is to be an active investor who also removes emotion completely from the equation, so you avoid unnecessary mistakes. You can do that by hiring an investment manager or using Artificial Intelligence (Robo-Advisors) to help you manage your portfolio over time. You can find both on tickeron.com.   

Related Ticker: SPY

SPY in -0.46% downward trend, sliding for three consecutive days on March 26, 2024

Moving lower for three straight days is viewed as a bearish sign. Keep an eye on this stock for future declines. Considering data from situations where SPY declined for three days, in of 246 cases, the price declined further within the following month. The odds of a continued downward trend are .

Price Prediction Chart

Technical Analysis (Indicators)

Bearish Trend Analysis

The 10-day RSI Indicator for SPY moved out of overbought territory on March 22, 2024. This could be a bearish sign for the stock. Traders may want to consider selling the stock or buying put options. Tickeron's A.I.dvisor looked at 47 similar instances where the indicator moved out of overbought territory. In of the 47 cases, the stock moved lower in the following days. This puts the odds of a move lower at .

The Stochastic Oscillator demonstrated that the ticker has stayed in the overbought zone for 7 days. The longer the ticker stays in the overbought zone, the sooner a price pull-back is expected.

SPY broke above its upper Bollinger Band on March 20, 2024. This could be a sign that the stock is set to drop as the stock moves back below the upper band and toward the middle band. You may want to consider selling the stock or exploring put options.

Bullish Trend Analysis

The Momentum Indicator moved above the 0 level on March 18, 2024. You may want to consider a long position or call options on SPY as a result. In of 64 past instances where the momentum indicator moved above 0, the stock continued to climb. The odds of a continued upward trend are .

The Moving Average Convergence Divergence (MACD) for SPY just turned positive on March 27, 2024. Looking at past instances where SPY's MACD turned positive, the stock continued to rise in of 50 cases over the following month. The odds of a continued upward trend are .

Following a 3-day Advance, the price is estimated to grow further. Considering data from situations where SPY advanced for three days, in of 361 cases, the price rose further within the following month. The odds of a continued upward trend are .

The Aroon Indicator entered an Uptrend today. In of 446 cases where SPY Aroon's Indicator entered an Uptrend, the price rose further within the following month. The odds of a continued Uptrend are .

Fundamental Analysis (Ratings)

Fear & Greed

Notable companies

The most notable companies in this group are Microsoft Corp (NASDAQ:MSFT), Apple (NASDAQ:AAPL), NVIDIA Corp (NASDAQ:NVDA), Alphabet (NASDAQ:GOOG), Alphabet (NASDAQ:GOOGL), Amazon.com (NASDAQ:AMZN), Meta Platforms (NASDAQ:META), Eli Lilly & Co (NYSE:LLY), Broadcom (NASDAQ:AVGO), JPMorgan Chase & Co (NYSE:JPM).

Industry description

The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P 500® Index. The Trust seeks to achieve its investment objective by holding a portfolio of the common stocks that are included in the index (the “Portfolio”), with the weight of each stock in the Portfolio substantially corresponding to the weight of such stock in the index.

Market Cap

The average market capitalization across the SPDR® S&P 500 ETF Trust ETF is 116.96B. The market cap for tickers in the group ranges from 5.96B to 3.13T. MSFT holds the highest valuation in this group at 3.13T. The lowest valued company is VFC at 5.96B.

High and low price notable news

The average weekly price growth across all stocks in the SPDR® S&P 500 ETF Trust ETF was 0%. For the same ETF, the average monthly price growth was 4%, and the average quarterly price growth was 23%. AES experienced the highest price growth at 14%, while LULU experienced the biggest fall at -18%.

Volume

The average weekly volume growth across all stocks in the SPDR® S&P 500 ETF Trust ETF was -9%. For the same stocks of the ETF, the average monthly volume growth was 3% and the average quarterly volume growth was -9%

Fundamental Analysis Ratings

The average fundamental analysis ratings, where 1 is best and 100 is worst, are as follows

Valuation Rating: 61
P/E Growth Rating: 51
Price Growth Rating: 34
SMR Rating: 51
Profit Risk Rating: 44
Seasonality Score: 24 (-100 ... +100)
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