Cody Sims: Does your portfolio accommodate both active and passive investing? – The Chattanoogan | Jewelry Dukan

Investors today live in an era that offers unprecedented global investment opportunities, both active and in
passive vehicles. Investments in each category present opportunities and challenges for investors
into account when creating an optimal financial strategy. With so many choices, how can you best take advantage of what the markets have to offer? There is no one right answer for everyone, but in many cases it can make sense to use both active and passive investing to effectively build and manage a diversified portfolio.

Definition of active and passive investing:

Active investing is an approach that aims to take advantage of market inefficiencies by identifying individual securities that do not currently appear to be valued based on their true underlying value. Success with this approach generally requires thorough research and analysis by knowledgeable investment professionals. Many traditional mutual funds fall into this category. Active fund managers who oversee these funds aim to achieve returns that are in line with a benchmark or a specific measure of market performance, such as metrics. B. the S&P 500 index, outperform. You make investment decisions based on a defined approach or strategy.

On the other hand, passive investing is an approach that aims to match performance or a specific benchmark or segment of the market. For example, many passive investors choose to invest their money in an index fund that invests in a broad segment of the market. Perhaps the most common passive investments are funds that track the performance of the S&P 500 Index, an unmanaged index of US large-cap stocks. The premise is to own a broad cross-section of the market or a market segment, rather than trying to identify specific securities that may outperform a benchmark or market segment.

It’s worth noting that there are more and more investment options that offer a middle ground between active and passive strategies. Referred to as strategic or smart beta, this investment strategy seeks to combine the transparency, consistency and cost-efficiency of passive investing with the investment insights of active management.

Considerations for each approach:

Each approach has advantages and disadvantages. Actively managed investment strategies offer the opportunity to outperform a particular segment of the market. They can also take steps to defend themselves against the effects of falling markets that inevitably occur from time to time, often by avoiding individual securities or sectors that are facing challenges. In order to reflect the required research and expertise, actively managed investments tend to have higher costs which reduce the net returns they generate. Also, because they adopt a selective investment approach, they sometimes choose to invest in securities that underperform and may miss out on the full benefit of broader market uptrends.

A key benefit of passive investing is that fees tend to be lower than other investment strategies. They are also typically tax efficient as trading in the fund is minimized as it continues to track an index over the long term. A disadvantage of passive funds is that by simply investing in a benchmark, an investor forfeits the opportunity to outperform that index. This means that returns are typically in line with the market, minus any fees. Even during times of volatility or when markets are trending down, investors in index funds will see their investments follow a similar path.

A case for both strategies:

Is one approach the best choice for your portfolio? The reality for many investors is that a combined approach can be an effective solution. Investors should be aware of factors that may affect their investment results, including fees, various sources of potential investment returns and the benefits of a diversified portfolio.

You can choose to have a portion of your portfolio generally follow the market. Then a passive fund can make sense. At the same time, you may want to take advantage of specific opportunities in market segments where selectivity can help you achieve your goals. In this case, active strategies can provide a better path to success.

The good news is that you have a tremendous opportunity to effectively diversify and adjust your portfolio to help you meet your long-term goals. A financial advisor can work with you to determine which approach and investments will work best given your financial goals, investment time horizon, and risk profile.

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Cody Sims, CRPC, AAMS, AWMA, is a financial advisor and franchisee with Ameriprise Financial Services, LLC. in Chattanooga, Tn. He specializes in fee-based financial planning and wealth management strategies and has been in practice for 27 years. To contact him,, 423-648-2900, and 412 Georgia Ave., Suite 210, Chattanooga, Tn. 37403.

Investment advisory products and services are provided through Ameriprise Financial Services, LLC, a registered investment adviser.

Investment products are not insured by the FDIC, NCUA or any federal agency, are not deposits or liabilities of or guaranteed by any financial institution and involve investment risks, including potential loss of capital and fluctuation in value.

Ameriprise Financial Services, LLC. Member of FINRA and SIPC. 2022 Ameriprise Financial, Inc. All rights reserved.

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