Passive vs Active Management

Passive and active are two styles of portfolio management.
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Passive portfolio management requires minimal attention from the investor, and once initiated, is left alone with little or no intervention.

Passive management is often referred to as index investing and seeks to match the broader market indices’ returns. This is primarily accomplished by purchasing the stocks that comprise an index fund or purchasing ETFs designed to replicate the performance of the major indices with the intention of holding positions long-term.

A passive portfolio will perform similarly to the overall market and has historically performed well over long time frames.

One benefit of passive portfolio management is lower trading costs and lower management fees. 

Active portfolio management involves buying and selling assets with the aim of outperforming the broad market indices via active market participation. Active portfolio management requires more attention and may have higher associated trading costs.

Active management uses specific strategies designed to use fundamental and/or technical analysis to time purchases and sales in an attempt to gain an edge over the long-term buy and hold strategy of passive portfolio management.

Actively managed ETFs and mutual funds typically charge higher management fees than passively managed funds.

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FAQs

Do active funds outperform passive funds?

The historical returns of individual funds varies. Active portfolio management involves buying and selling assets with the aim of outperforming the broad market indices via active market participation.

Active portfolio management requires more attention and may have higher associated trading costs. Active management uses specific strategies designed to use fundamental and/or technical analysis to time purchases and sales in an attempt to gain an edge over the long-term buy and hold strategy of passive portfolio management.

Is Warren Buffett an active or passive investor?

Warren Buffett is perhaps the most widely known value investor in the world and continues to actively manage the accounts of Berkshire Hathaway. Buffet typically has a long-term buy and hold approach which does not demand daily trading activity.

However, because he is invested in individual companies as well as index funds, he would be considered an active investor. 

How do you tell if a fund is active or passive?

Passive funds often have the word “index” in the fund name or description. Passive portfolio management requires minimal attention from the investor, and once initiated, is left alone with little or no intervention.

Passive management is often referred to as index investing and seeks to match the broader market indices’ returns. This is primarily accomplished by purchasing the stocks that comprise an index fund or purchasing ETFs designed to replicate the performance of the major indices with the intention of holding positions long-term. A passive portfolio will perform similarly to the overall market.

Active portfolio management involves buying and selling assets with the aim of outperforming the broad market indices via active market participation. Active portfolio management requires more attention than passive portfolio management and typically includes multiple individual securities, as opposed to index funds and similar ETFs.

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