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Actively Managed Portfolios

While the debate between actively and passively managed portfolios will go on, there are reasons to consider actively managed portfolios. The focus on active management tends to be the choice between using passive/index funds and actively managed funds. 

Passive funds tend to emulate an index however not all passive funds are index funds. The purpose is to gain the desired asset class exposure and not try to pick an outperforming fund. The academic research suggests that actively managed funds do not consistently outperform their benchmarks, there are however actively managed funds that do outperform their peers and indicies over various periods of time. The difficulty is being able to have the foresight to pick which funds are going to outperform and knowing when to switch when they begin to under perform. One missing piece to this debate is the risk level of the active fund to the passive fund. In other words, an active fund might not outperform on an absolute basis, but can when adjusted for the amount of risk and volatility, however this is rarely considered. For some, it is worth the cost to take the risk to choose one of those outperforming funds. For others, the cost is worthwhile to better control risk. 

The other aspect of active investing is at the asset allocation level. This is typically referred to as tactical asset allocation where an attempt is made to either increase return and/or reduce risk by modifying the allocations from the long-term (strategic) targets. This aspect of active investing is rarely discussed in the active vs. passive debate and does have merit. A key point to active or tactical allocation strategies is that they can be implemented either with actively managed funds, passive/index funds, or a combination of both. 

Tactical management can have constraints that limit the range of these allocation changes while some do not have constraints which allow them to "go anywhere" depending upon the desired outcome. 

Both active and passive strategies have merit in creating diversified portfolios. Schedule an Introductory Call to learn more about the differences and we can build you a diversified portfolio that is best for you.