Active vs Passive Management
When it comes to deciding how long to keep each investment, investors are essentially making a choice between active and passive management.
Active investors are looking for returns that beat the overall market. Through extensive research, forecasting, expertise, and strategic timing, they are looking to take advantage of short-term price fluctuations in order to maximize their potential returns.
Passive investors adopt a long-term outlook towards each asset they hold, and intend to trade as little as possible on their account. They intend to ride out the regular ups and downs of the market, taking advantage of the long-term trends.
Which is Better?
Each style has its own acolytes, and for good reason. Proponents of active investing say that passive investors are leaving money on the table by not optimizing their portfolios, and are left with few options but to wait out longterm market downturns. These strategies are popular with institutional investors, as well as individuals with aggressive risk profiles and shorter term time horizons. On the other hand, passive investors say that the added time, trading, and advisory costs associated with active management eat up any excess returns that an active strategy might bring in. A typical passive investor can be anything from an investing neophyte to a large institutional investor looking for stable returns.
So which strategy is better? In short, both are. Active strategies are great during periods of volatility or contraction, so long as management costs are kept down. Passive strategies are great for long-term investors who are looking for cost-efficient solutions, so long as there are no sudden market downturns that negate years of gradual growth. Both strategies exist because there is a need for both of them.
The Hybrid Strategy
In recent years, some portfolio managers have adopted a hybrid strategy for portfolio management, combining active and passive strategies for the best possible results. A hybrid strategy might use a passive approach during long-term periods of market stability, but put in place safeguards that will trigger a switch to a more active strategy if volatility rises or markets seem to be in trouble. Or, a hybrid strategy might consist of using multiple passive ETFs to create a diversified portfolio which can then be regularly rebalanced in an active manner.