There is an abundance of information about passive and active money management and you may determine that one or the other approach is best for you. After considering both strategies, you may find that you do not completely fit into one style or the other and that using both approaches may be best for you. This discussion will give you a basic overview of both.
The theory behind active management is that there is a belief that markets are inefficient and that stocks are often mispriced. Active money managers make specific investments with the goal of outperforming a benchmark index by relying on their own professional judgment, analytical research and forecasts. Active management is a dynamic strategy in that the money managers reallocate and rebalance the portfolio on an ongoing basis to adjust to market conditions. This strategy offers the potential to beat the market by exploiting inefficiencies in pricing. And, in theory, this strategy has the ability to defend against down markets. Generally, there are higher costs and fees associated with active management and, as with any investment there is a level of risk that investors assume.
Passive management is a market-driven investment strategy that seeks to match the risk characteristics and returns of a specific index by replicating the securities in the index. The theory behind this investment style is that markets are efficient which suggests that the price of a security is the fair value price. Passive management investments offer broad diversification with generally low expenses and tax efficiency. However they do not defend against down markets and do not attempt to beat index returns.
The decision to choose active or passive money management styles should be made in the context of your overall investment objectives and ability to tolerate risk. You may choose to use both strategies in a balanced approach to help achieve your overall investment goals.