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What is the difference between active and passive money management?

What is the difference between active and passive money management?

The debate on whether active or passive management is better for investors has polarized many advisors and theorists for years. There are two schools of thought when it comes to long-term investing.

One basically states that you should determine a proper allocation of asset classes for yourself, buy index funds to reflect each particular asset class, and possibly rebalance the portfolio periodically. This basically means “set it and forget it,” and the investor must be willing to ignore fluctuations in the markets and maintain a faith in an Efficient Market.

The second philosophy requires more time and energy because it entails attempting to find the best money managers for each asset class in the hopes that they will provide what is known as “Alpha” – the outperformance of the index for a particular asset class by an active portfolio manager.

The individual must monitor their portfolio of actively managed funds, compare their performance to indices, and constantly search for other active managers who may have a strong position in the same asset class or another one.

The investor will also be paying a premium for the services of the active managers, and many passive investors insist that it’s not worth the money, since markets are efficient. Active managers specialize in finding inefficiencies, however, and this is the source of any Alpha they are able to generate.

If only you could have found Warren Buffett in 1958 and Peter Lynch in 1968; you would have been retired by now and not reading this! When seeking active managers, you have to make a decision about which style corresponds to your investment philosophy, the time and energy you are willing to devote to watching your money alongside them, and whether or not you have the confidence to religiously adhere to your philosophy.

We’re strong believers in active portfolio management, so visit Tickeron to make sure your assets are properly managed.

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Keywords: market indices, investment managers, asset allocation, alpha, money manager, Warren Buffett, efficient markets, index funds, asset classes,