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Active Versus Passive Investing

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SUMMARY

It’s an ongoing and rather heated debate: are active or passive investments better? Actively managed investment opportunities involve careful research, analysis, and selection of individual securities in an effort to outperform the benchmark. Passive investments attempt to match the investments listed in an index and, therefore, match its performance. Passive investments are typically cheaper; active investments require higher fees to pay for the selection process.

What does this mean for investors? In many cases, using both active and passive strategies in the appropriate areas can help increase returns in an investor’s portfolio. It can make sense to pay for active management when there is greater potential for additional rewards and to save money with passive investments in efficient areas of the market. This paper takes a close look at the advantages and disadvantages of both active and passive investing, and offers insights into the areas to focus on for helping an investor meet their goals.

KEY TAKEAWAYS

  • The active versus passive de­bate does not yield a clear-cut solution that would eliminate one or the other. Instead, each approach can serve a purpose in an investor’s overall portfolio.
  • Passive management can be effectively utilized in the large cap universe, and other efficient and transparent markets.
  • In the realm of active management, there are opportunities for those able to figure out what industries and companies will benefit from globaliza­tion, expanding populations, new technologies, and alternative investment trends.
  • Abbot Downing can help investors by recommending several passive management solutions as well as selecting and monitoring a broad array of active investment managers across the asset class spectrum.

DISCLOSURES

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns nor can diversification guarantee profits in a declining market.

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