By Adam Carlat, Special to Independent Newsmedia
“Active” and “passive” are competing approaches to portfolio management that have different implications for expenses and returns.
Active investing works on the premise that a human can identify specific securities and time the purchase or sale of those holdings to produce better-than-average returns. It involves more trading, which means more turnover and potentially higher expenses.
A passive approach focuses simply on rebalancing investments and redirecting dividends. Less activity equals fewer potential expenses.
On top of that, mutual funds themselves can be active or passive in their approaches. Active funds tend to have higher expense ratios because you’re paying a professional manager to make the investing decisions.
You might think that, as a financial professional, I would prefer the active approach. After all, more activity theoretically means more fees and more income for me.
But I don’t. That’s because the passive approach, on average, yields better long-term results.
Plus, since fewer trades mean lower expenses, there is more principal that can benefit from the magic of compounding interest over time.
I work for my clients and have a fiduciary responsibility to put clients’ interests first. It’s just good business as well. I consider myself more a coach than a salesman, so I want to help clients manage long-term goals and retirement strategies.
Whatever you decide, don’t act on headlines.
With the Dow surging past 20,000 in late January, you might be tempted to take some action to lock in your gains. It’s understandable, but unwise. If you do that, the next question becomes: “When do you get back into the market?”
Maybe you lock in gains, but you also have the potential to miss more gains because you don’t get back into the market in time. Make your investment decisions based on your outlined long-term plan, not a few months of market performance.
There always will be active investors who think they can beat the benchmarks, but the majority fail. Don’t get caught up in the excitement. The truth is: No one can predict which asset class will perform best in a given year. Therefore, a broadly diversified portfolio with different asset classes can really add benefit to the long-term performance of your investments. Also, the amount allocated to each asset class can vary based upon your risk tolerance and investment goals.
The key to a successful retirement strategy is to plan for the long haul. You worked hard for your money. Now is the time to sit back and let your money work for you.
Editor’s note: Mr. Carlat is a Glendale-based financial adviser and Chartered Retirement Planning Counselor® with One2One Wealth Strategies. Questions? Call 623-850-0016 or email Adam@121ws.com.