Management with passive tools can be considered a good alternative
Before going any further, it might be useful to define what active and passive management mean.
Active management: it tries to optimize returns according to a certain index or benchmark by selecting different assets.
This is what investment fund managers do.
Passive Management: it is focused on optimizing the selection of the different classes of assets in order to optimize the portfolio’s returns depending on the investor’s risk profile.
Regarding to the first type of management, our experience shows that it is possible. However, it has been proven that up to the 90% of the investment funds don’t provide additional value. Consequently, passive vehicles like ETFs are a great alternative to investment funds.
This makes the second type of management a very valid option (and our experience corroborates it): yet, it is highly conditioned by a good selection and distribution of the asset class.
In the end, both are not conflicting strategies and indeed they could and should be complementary to each other. In a previous article we proposed an investor priority pyramid that shows how the selection of the class of asset is a link below the asset selection. This means we should take this step before choosing our assets.
For that matter, the selection and distribution of the class of asset is essential. This must be done according to the investor profile. Once investors are sure about their tolerance to risk, it turns out to be very easy to create a first portfolio. In fact, a good and optimal solution for a beginner is to create an efficient portfolio based on ETFs. We can follow this procedure from a “passive management” perspective. However, the word “passive” can give rise to a bad interpretation: it doesn’t mean to do nothing at all. It becomes essential to establish a plan that by default invests in different passive management asset classes, in other words, that it invests in ETFs, which have proven to be more efficient thanks to their low cost.
In Inbestme we are keen supporters of passive management understood as investing with ETFs. This strategy allows investors that don’t have much time to be successful by building a simple and well diversified portfolio at a low cost.
Inbestme goes a step further with our diversified portfolios because we apply a dynamic management with passive management assets. This dynamic approach is possible due to regular rebalancing events and the adaptation of the different components to the current market situation. Our diversified portfolios are based on the different asset classes’ complementariness. If one or more assets don’t provide any additional value we apply different corrections in order to avoid risk.
Any private investor that has time can become successful with an active management if he/she learns to how to make a good asset selection. Curiously, as there are no investment fund constraints, there are more options pointing towards success. We do this by creating a portfolio pyramid in our diversified portfolios.
To conclude, active management (selecting good actions) or passive management, especially if it is dynamic, (building an ETF diversified portfolio) are both valid investment management alternatives. Everything depends on the time that we want to devote to our investments.