Within investing, there are two main approaches to portfolio management: passive and active. In this blog, we will focus on active portfolio management and why it can be an effective tool for investing.
What is active portfolio management?
Active portfolio management is a hands-on approach to managing investments, where the portfolio manager actively buys and sells assets such as stocks based on market conditions, economic trends, and other factors. Active portfolio management aims to outperform the market and deliver higher returns than passive investment strategies (such as buying and holding an index fund).
How active portfolio management can be effective…
There are some aspects of active portfolio management that can make it effective:
- Expertise and market knowledge of the portfolio manager: Portfolio managers use a combination of fundamental and technical analysis to identify investment opportunities and make informed decisions.
- Ability to provide a customized investment approach: Portfolio managers can tailor investment portfolios to meet specific investment goals and risk tolerance, which can be important for individual investors, institutions, and pension funds.
- Allows for greater flexibility in responding to market conditions and other factors: Portfolio managers can quickly make adjustments to their portfolios as market conditions change, allowing them to take advantage of opportunities and address risk.
…And how it can fall short
Active portfolio management can be an effective approach to investing; however, it is essential to remember that it also comes with downsides such as higher fees and the risk of underperformance. On average, active management does not always beat the major indices. However, there are some great managers who at times do — these types of managers can meet a market need for a portion of many people’s funds.
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