An actively managed portfolio is an investment portfolio where the individual investments are chosen and managed by a human investment advisor.
This means that the investment advisor actively buys and sells investments in the portfolio, instead of following a preset, static asset allocation.
The actively managed portfolio often consists of individual stocks and bonds, or mutual funds that are actively managed by an investment manager.
This is in contrast to a passively managed portfolio, which is an investment portfolio where the individual investments are chosen by a computer algorithm and not actively managed by a human.
What is Active Management?
Active management is a process where a human actively buys and sells investments, instead of letting a computer choose the asset allocation.
This includes what stocks to buy, when to buy them and when to sell them. The advantage of this style is that it gives you more control over your portfolio and allows you to take advantage of opportunities as they arise.
The goal of active management is to produce higher returns than what you would get from investing in a passive portfolio.
Active management is often used when investors believe they can identify specific investments that will outperform the market as a whole.
While this may be true in some cases, it is not always the case that an actively managed portfolio will outperform a passively managed one.
In fact, actively managed portfolios often have higher fees than passively managed ones, which can eat into your returns.
Active Management Process
The active management process is a method of investing that actively buys and sells investments based on the individual's own judgment.
It usually involves three main steps:
1. Planning
This step involves analyzing and identifying the investor's goals, risk tolerance, and investment objectives.
From this risks and objectives can be determined and a plan can be put together to achieve these goals.
2. Execution
This step involves the implementation of the plan. Strategies were integrated into the plan in order to achieve goals and objectives.
The process involves actively managing a portfolio of individual investments such as stocks, bonds, or mutual funds.
3. Feedback
This step involves actively monitoring and evaluating the progress of the plan. Adjustments are made to the plan as needed in order to achieve desired results.
Advantages and Disadvantages of Active Management
The advantages of active management include:
- Greater control over your portfolio, with actively managed portfolios you have more control over what investments are included and how they are managed.
- Ability to take advantage of market opportunities, active management allows you to capitalize on opportunities as they arise.
- Greater potential for higher returns, actively managed portfolios have the potential to generate higher returns than passively managed ones.
- More personalized service, with an actively managed portfolio you typically receive more personalized service from your investment advisor.
The disadvantages of active management include:
- Higher fees, actively managed portfolios often have higher fees than passively managed ones.
- Greater risk, actively managed portfolios are typically riskier than passively managed ones.
- Greater time commitment, actively managing a portfolio takes more time than passively managing one.
- Less diversification, actively managed portfolios are often less diversified than passively managed ones.
- The increased possibility of underperforming the market, there is a greater chance that an actively managed portfolio will underperform the market as a whole.
Active vs Passive Management
So, what is the difference between actively managed and passively managed funds?
An actively managed fund is one that actively buys and sells investments based on the individual's own judgment.
A passively managed fund is one that follows an index or other predetermined set of criteria for buying and selling investments.
The main differences between active management vs passive management are:
- Active management is based on the individual's own judgment, while passive management follows an index or other predetermined set of criteria for buying and selling investments.
- Active management actively buys and sells investments based on their own judgment, while passive management typically only invests in the stocks comprising a specific index (like the S&P 500).
- Actively managed funds have the potential to outperform the market, while passively managed funds have the potential to match the returns of the market.
- Active management involves more risk than passive management, as actively managed portfolios are typically riskier than passively managed ones.
- Passive management is usually cheaper than active management, as actively managed portfolios often have higher fees than passively managed ones.
- Actively managed funds have a greater chance of underperforming the market, while passively managed funds are more likely to outperform the market over time (especially when considering fees).
Which is better?
When it comes to actively managing your portfolio vs. passively managing it, there is no right answer. Both approaches have their pros and cons, and it ultimately comes down to what is best for you.
If you are looking for potential for higher returns, greater control over your portfolio, and more personalized service, then active management may be a good option for you.
However, if you are looking for lower fees, less risk, and simpler investing options, passive management may be the better choice for you.
No matter which approaches you choose, make sure to do your research and talk to a financial advisor before making any decisions.
The Bottom Line
An actively managed portfolio is an investment portfolio that is actively managed by you or your investment advisor, while a passively managed portfolio follows an index or other predetermined set of rules for investing.
Active management is the process where an investor or fund manager makes decisions about which investments to buy and sell in order to beat the market.
There are pros as well as cons to actively managing your portfolio. It is up to you to determine what's best for you and your financial situation, but either path can be a successful one if done properly.
FAQs
1. What is active management?
Active management is the process where an investor or fund manager makes decisions about which investments to buy and sell in order to beat the market. This involves actively buying and selling securities based on their own analysis of the market.
2. What percentage of actively managed portfolios beat the market?
There is no definitive answer to this question. Since 2022, the percentage of actively managed funds that have outperformed the S&P 500 over the past 15 years has dropped to 10%. In certain circumstances this percentage can increase, but not consistently.
3. What happens when actively managed portfolios do not beat the market?
When actively managed portfolios do not beat the market, investors can experience lower returns than if they had invested in a passively managed portfolio which followed an index. This is because actively managed portfolios typically have higher fees than passively managed ones.
4. Which has lower risk: actively managed or passively managed portfolios?
Passively managed portfolios have less risk than actively managed ones, as they are typically more diversified. This is because actively managed portfolios typically invest in only a limited number of securities, while passively managed ones hold many different types of investments.
5. Why does passive management have lower fees?
Passive management has lower fees because actively managed portfolios have to pay investment advisors to actively manage the portfolio. This involves making frequent buy and sell decisions, which leads to higher fees. While passively managed ones follow an index or other predetermined set of rules for investing.
