Rush Hour, Market Volatility, and Evidence-Based Investing: Part II
Actively vs. Passively Managed Funds
There is no lack of debate in the financial community regarding which type of fund is superior: actively managed versus passively managed funds.
Actively managed funds are a group of funds that are controlled by a manager or team of managers who aim to outperform the market with the frequent buying and selling of equities based on that manager’s expertise, experience, or personal judgment—similar to the types of drivers who exit the highway in rush hour believing they’ll find a quicker route and only return when the congestion appears to have cleared. Due to the nature of this active management, these funds carry higher expense ratios and charge heftier management fees than their passively managed counterparts.
Passively managed funds, by contrast, aim to follow a market index. There is no management team making personal investment decisions on everyone’s behalf. This strategy involves building a portfolio, or purchasing index funds, that seek to track and mimic the performance of a benchmark index, such as the S&P 500. Stocks are bought and sold when the market index moves in or out of a certain range, not according to an active manager’s prediction or latest trend.
Get on the highway and stay the course! Due to their low turnover rate, passively managed funds and index funds, alike, are low-cost and often tax efficient. Additionally, they are generally more diversified than actively managed funds, and, as a result, provide greater control over a portfolio’s risk exposure.
Essentially, passively managed funds and index funds rely on the efficiency of the market to provide lower-risk, long-term returns, rather than trying to outrun market volatilities for risky, short-term gains.
As Dimensional Fund Advisor’s David Booth asserts, “Where people get killed is getting in and out of investments. They get halfway into something, lose confidence, and then try something else. It’s important to have a philosophy.”
As evidence-based practitioners, we couldn’t agree more. We rely on historical evidence to inform our decision to favor globally diversified portfolios of low-management fee, passive type funds in asset allocations appropriate for each investor.
At the end of the day, no one can control the traffic or the market, but you can control how you choose to handle each.
If you feel your current investment philosophy is not aligned with your long-term investment goals, one of our Certified Financial Planner™ professionals would love to discuss the benefits of evidence-based investing with you. Contact us today for a complimentary Get Acquainted meeting. We look forward to meeting you.