A key concept in financial planning and portfolio management is asset allocation. This process divides investments among different types of assets – stock, bonds, real estate and cash – to balance the risks and rewards within a portfolio. Active-passive investing is the investment strategy we use at Perspective Financial, and it takes the asset allocation process a step deeper. In this brief video, we explain how and why it works. Click here to read the video transcript.

 

 

Select photos in video courtesy of Renjith Krishnan, nuttakit and Pong at freedigitalphotos.net

 

Active-Passive Investing Video Transcript

A key concept in financial planning and portfolio management is asset allocation. This process divides investments among different types of assets – stock, bonds, real estate and cash – to balance the risks and rewards within a portfolio. The proper balance of investments varies depending on the individual, and that balance is determined by evaluating your current financial situation, short- and long-term needs, retirement plans, goals, dreams and more.

Active/passive investing is the investment strategy we use at Perspective Financial, and it takes the asset allocation process a step deeper. This strategy combines index funds (the passive investments) with mutual funds or individual securities (the active investments).

With indexing, a portfolio is designed to mirror the performance of a stock index, such as the S&P 500. It is a passive, low-risk approach to investing that seeks to benchmark a certain level of performance. Active management, on the other hand, seeks to outperform the market through selection of funds based on informed, independent judgment. This approach to investing takes on a higher level of risk.

Some investors believe these two investing approaches are contradictory – if one is right, then the other must be wrong. Yet, when used together, they actually can complement one another and build a strong portfolio.

An investor cannot expect to outperform the benchmark with indexing alone. Because the markets are not perfectly efficient, active management creates the opportunity to add value to a portfolio above the benchmark. Thus, the active/passive approach can moderate the swings between the extremes of relative performance in the markets and provide a more comfortable degree of risk control. This combined approach also can help avoid the pangs of regret or uncertainty that some investors feel when they follow one approach or the other and it falls short of expectations.

Active/passive works best when investors work with a knowledgeable advisor to create and follow a clearly defined investment philosophy and a consistent, long-term approach to investing, regardless of market cycles.

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