Mutual Funds and Exchange Traded Funds
Investing and assessing opportunities takes time and energy. It can also be hard to diversify your portfolio if your balance isn't very high yet. Many investors choose to hire managers to help them solve those two challenges--time and diversification. The most common way investors do this is by investing in a mutual fund or an exchange traded fund (ETF). When considering mutual funds or ETFs, it's important to evaluate whether you want active or passive management.
Active management is when a fund manager attempts to outperform a benchmark. Generally speaking, beating a benchmark consistently is very hard to do and investors should be skeptical of any manager who claims to significantly beat the benchmark regularly. However, good active management can improve the risk profile of an investment, protect from sudden moves in the market, or help an investor find and invest in a specific opportunity.
Passive investing, also called “indexing”, is where a fund manager attempts to match a benchmark. Instead of picking and choosing which security to buy, the manager attempts to “buy everything” the benchmark is tracking. This strategy tends to beat active managers over the long run, and we highly recommend new investors, or those with a smaller nest egg, to begin with those strategies. Passive investing also costs less than active management because there is far less overhead.