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What is active trading?

What is active trading?

Active trading is the pursuit of returns in excess of market benchmarks. Investors are advised to have a diverse portfolio, to hedge against the risk of seeing future financial plans devastated due to significant losses in one holding.

When attempting to diversify, investors will hear from the increasingly popular camp which believes that the best strategy is to use only passive index funds, which follow indexes using computer algorithms and have low expense ratios.

The other camp believes that active managers have a better chance of generating superior returns— after all, they have eyes and ears, and are likely to learn things that the computer algorithm running a passive fund will not. There are plenty of examples of active managers outperforming indexes, but detractors say that active managers who do well in one period will not continue to do well over the long-term.

Due to the fees being charged for active management, this does appear to be the case on average over the long -term. But, once again, past performance does not predict future results, and the next 20 years may have a different outcome. Proponents of active management also would suggest that investors remain nimble and don’t rely on one actively managed fund to generate all of their alpha.

Alpha is a term describing returns over a benchmark’s performance. Correlation to the benchmark is known as beta.

Keywords: benchmark, passive investing, alpha, Beta, detractors, active trading,