When it comes to investing, there is not one strategy that fits all. There are many different situations and circumstances that can call for different investment strategies, depending on the investor in question. It is important to make sure that as an investor you are vetting and determining which investments will best fit your particular situation, financial goals, needs, risk tolerance and time horizon. Where should you begin your search for the best investment for you? Most simplistically, investment strategies can be broken down into two specific categories; we know them as active investing (active management) and passive investing (passive management). In order for us to attain a better understanding of how each strategy functions, operates and performs over a longer period of time, we’re going to focus only on passive investing (management) in this article. In the next article, we will cover active investing and in the final of the three part series, we will compare passive investing versus active investing. With that, investors can discern the potential benefits and pitfalls between the two investment strategies prior to deploying such a strategy in their own investment portfolio.
What exactly is passive investing you ask? It can be defined as an investment strategy that tracks a market-weighted index or portfolio. This strategy is designed to maximize returns over a longer period of time by keeping the trading (buying and selling) to a minimum. With passive management, it is common for investors to mimic the performance of a specific index by buying and holding an index fund. As the investor is directly invested in a specific index, there is a direct correlation between that index and the fund’s performance. It is important to understand that the investor can expect to perform only as well or as poorly as the index itself. By purchasing and holding onto an index fund, the investor will perform in line with the correlated index with minimal trading and management expenses.
ETFs provide a convenient and low-cost opportunity to implement indexing, or passive management. ETFs are available in an extensive variety and they track just about every index in existence. In addition to the vast number of ETFs to choose from, other potential benefits can include low turnover, low cost, no unintended capital gain exposure, broader diversification and a lower expense ratio when compared to its actively managed counterparts.
No matter how enticing passive management may sound, it is vital that you consult with a financial advisor that can help determine whether or not this type of investment strategy is going to fit your financial life. It is also crucial that you as an investor fully understand both types of investment strategies, active and passive management, so that you can accurately determine which form of investing is right for you. Stay tuned for our next blog article as we will go into detail on active investing. Be sure to check out the latest edition of the Mitlin Minute in order to learn more about passive investing. If you are curious to learn if passive investing is the best route for you and your family, do not hesitate to give us a call and let Mitlin Financial, Inc. help educate you, guide you and facilitate your financial future.