The heightened volatility that has afflicted the U.S. stock market for the past several months points out the potential benefits of active portfolio management. What distinguishes an active investment style from a passive style — and what benefits may active management provide in a volatile market?
Because active managers may rely on market analysis and rigorous company-by-company research, proponents say they could be better able to ferret out opportunities in the market than passive managers who essentially “buy the market” by investing in the companies represented by a certain index and holding on to them until the index itself changes course.
The passive approach may be an easier way to follow the market, but it could also leave investors more vulnerable to the market’s whims, which can be a problem during periods of prolonged volatility like the one we have experienced recently.
Active Management Offers Flexibility
While the active investment style is often associated with investors who are willing to take on greater risk for the potential of greater returns, that is not always the case. In fact, one of the potential benefits of active styles is that they could give investors more flexibility to target their own risk profile more directly. Of course, if you are an investor who is looking for “home runs,” there are active managers out there who will strive for that, but in many cases, investors pursue active management strategies in order to potentially reduce risk in their portfolios.
Take a Well-Rounded Approach
As valuable as active portfolio management may be in isolating potential growth opportunities in the market, this type of targeted analysis alone does not tell the whole story. Individual companies are affected in unique ways by a host of factors, both external economic conditions as well as internal issues related to the operations of the company. That’s why many portfolio managers combine active company-by-company analysis with a review of external economic conditions such as inflation and interest rates.
In the final analysis, investors who adhere to an investment policy that relies on a well-diversified mix of investments, who are patient with the market’s changing moods, and who have the discipline to set goals and review them on a regular basis may be in the best position to achieve the results they are looking for — despite the market’s short-term gyrations.
This communication is not intended to be investment advice and should not be treated as such. Each individual’s situation is different. You should contact your financial advisor to discuss your personal situation.
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