Allard LTD. CPA & Financial Services

(952) 895-0895

Investment Read Time: 3 min

The Great Debate Continues: Active vs. Passive

Whether it’s sports, music, or politics, life holds any number of “great debates”– debates that never seem to reach a conclusion. In investments, that great debate asks the question, “Active or Passive Investing: Which is Better?”

The fascinating aspect of this debate is that equally intelligent people can argue polar opposite positions, leaving the rest of us to wonder what the answer is, if one even exists.

Passive Pointers

The case for passive management is anchored in the evidence that the preponderance of money managers have failed consistently to beat their comparative index. This is true for two primary reasons:

  1. Markets are efficient and all known information is already reflected in the price of the stock, making it difficult for managers to find companies that are expected to outperform.1
  2. The hurdle of an elevated expense ratio typical of actively managed mutual funds makes it hard to match or exceed a low-expense index fund.

Active Arguments

Active managers counter that while the markets may be generally efficient, there are windows of inefficiency created by the time it takes for information to properly reflect in a stock’s price.

Active managers further argue that performance is not just about relative return, but also about managing risk. For instance, if an active manager can deliver a hypothetical 90 percent of the index return at 70 percent of its risk, then that constitutes a measure of outperformance.2

Unlock the Combination

Ultimately, it’s a decision based on what you want to pursue. Do you prefer the approach taken by index funds or the strategy behind active management? For some, the combination of both funds represents an approach that takes no sides but seeks to tap into the distinctive benefits each offers.

Mutual funds are sold only by prospectus. Please consider the charges, risks, expenses and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money.

International investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share price volatility.

1. Keep in mind that the return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost.
2. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments.

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |
 

Related Content

Silver Sneakers 101

Silver Sneakers 101

Medicare’s popular program, offering free gym membership and health education.

A Primer on Dividends

A Primer on Dividends

A company's profits can be reinvested or paid out to the company’s shareholders as “dividends."

Infographic: Women Are Financially Savvy

Infographic: Women Are Financially Savvy

Women are financially savvy. Yet, there are still unique challenges working against women in retirement.

 

Have A Question About This Topic?







Thank you! Oops!

Do You Know the Whole Life Story?

Change comes at us from every angle as people update and upgrade everything from their diets to their devices, seemingly every day.

Financial Hacks for Millennials: Student-Debt

Here are seven ways to reduce that debt and live more confidently.

Attract Better Employees with Better Benefits

In a good economy, smart business owners know that a benefits package needs to fan a candidate’s excitement for joining...

View all articles

Annuity Comparison

This calculator compares a hypothetical fixed annuity with an account where the interest is taxed each year.

Potential Income from an IRA

Estimate your monthly and annual income from various IRA types.

A Look at Systematic Withdrawals

This calculator may help you estimate how long funds may last given regular withdrawals.

View all calculators

5 Smart Investing Principles

Principles that can help create a portfolio designed to pursue investment goals.

Investment Strategies for Retirement

Investment tools and strategies that can enable you to pursue your retirement goals.

Protecting Those Who Matter Most

The importance of life insurance, how it works, and how much coverage you need.

View all presentations

Retiring the 4% Rule

A portfolio created with your long-term objectives in mind is crucial as you pursue your dream retirement.

Coaches

Coaches have helped you your whole life, in ways big and small. We’d like to be one of them.

The Business Cycle

How will you weather the ups and downs of the business cycle?

View all videos