It is one of the most hotly debated topics in the financial industry – and it’s also one of the most misapplied topics too. Are investors better off utilizing passive or active strategies? Or should investors combine the two?

But before you answer, I want you to think about this: passive vs. active should apply to strategies – not investing. There is a big difference.

Passive vs. Active Strategies

Truth: there is simply no one size fits all approach to investing strategy. And if someone tells you there is, run.

For certain investors, investing in passively-managed index funds (or ETFs) makes sense – this is referred to as a passive strategy. For other investors, investing in actively-managed mutual funds makes sense – an active strategy. And some investors are well served putting passively-managed ETFs as their core holdings, surrounded by actively-managed sector funds. For others, having actively-managed mutual funds at the core surrounded by sector ETFs works well too.

In other words, you can pick one or both.

But That’s Not The Point I Want to Make

Here is something you must remember: no matter which strategy you select, you and your advisor should not be passive about actually managing them in and out of your asset allocation: You And Your Advisor Must Be Very Active. Let me explain.

The Main Point

Even if you are a savvy investor who’s perfectly capable of understanding financial concepts and applying them to your own portfolio, there will be times when you need to rotate your investments in and out of your portfolio – you need to actively manage your investments.

Maybe you’ve changed jobs, are starting a family, buying a house or nearing retirement – if you keep your portfolio static for too long, something is bound to go wrong – and usually at the worse time.

Which brings me to the do-it-your-selfers vs. working with an advisor. There are a ton of factors that will affect your success. Here are a few to consider:

Can you really keep your emotions out of it?

This is your money, your retirement, your kids’ college fund. Many people make big financial mistakes when they panic because of news events or because of what their neighbor told them. Who is going to ask you the hard questions that you don’t want to hear? Your Advisor.

Do you really have the time?

Deciding between active- vs. passive-investing and then building a diversified portfolio for you at the right time in your life isn’t something you can do with a
few Google key strokes. There is a lot of research involved, historical data points to reference and prospectuses to read. And then there are tweaks to make along the way as your life changes. Your Advisor has research tools.

Don’t think the last few years make you smart

Maybe you’ve had some success over the last few years investing on your own. But remember that expression “a rising tide lifts all boats?” What happens when – not if – when the market turns? Do you know what products might work well in a down market? Or when interest rates rise? To protect your income stream? Your Advisor knows.

The Investment Options are Only Getting More Complex and More Numerous

It wasn’t that long ago that investors did okay with a few simple products – maybe a Bank CD or a stock from the Nifty 50 or a large cap growth fund. But today, there are almost 20,000 mutual funds, ETFs, closed-end funds and UITs. Can you really research 55 of these every single day? Because it would take you a year of doing that to get through them all. But the more staggering thought is this: there are more stock market indexes in the US than there are stocks.

Active vs passive

Conclusion

You might prefer a passive strategy (index funds and ETFs) or you might prefer an active strategy (actively-managed mutual funds) or both. But as your advisor, I am always monitoring, researching, and reviewing all of your investments. It’s what I do.

M. Kathryn Clark, AIF® CFP®

kclark@barnescapgroup.com


No strategy assures success or protects against loss. Investing in stocks and mutual funds involves risk, including possible loss of principal. An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors. Unit Investment Trusts (UITS) are a fixed portfolio of securities with a set term. Strategies are long term, therefore investors should consider their ability to pursue investing in successive trusts and the tax consequences. CD’s are FDIC Insured and offer a fixed rate of return if held to maturity. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Independent Financial Partners (IFP), a Registered Investment Advisor. Barnes Capital Group and IFP are separate entities from LPL Financial.

Copyright © 2017 RSW Publishing. All rights reserved.

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