Reasons to Become an Active Investor

While the consensus among finance experts is that passive investing is generally a more effective and cost-efficient strategy compared to active managing an investment portfolio, there are some situations where an investor might choose active management over passive management.

Here are three reasons why an investor might want to pursue active management:

• Flexibility and Customization: Active management allows investors to customize their portfolio based on their individual goals, risk tolerance, and market outlook. For example, an investor who is bullish on a sector or stock may choose to overweight that stock in their portfolio. Similarly, an investor who is concerned about a risk, such as inflation, may choose to invest in assets that are likely to perform well in an inflationary environment. Active management allows investors to tailor their portfolio to their specific preferences in a way that passive management cannot. Regardless of whether those preferences result in superior performance or not.
• Potential for Higher Returns: While history proves that “beating the market” is statistically unlikely, some investors may believe that they have the skill or expertise to do so. And, at least using active management, they have a chance. Passive indexing virtually guarantees that investors will achieve the average rate of return for their chosen benchmark. Outperformance is only possible using active management.
• ESG Considerations: Environmental, social, and governance (ESG) considerations are becoming increasingly important for investors. Some active managers specialize in investing in companies that meet certain ESG criteria, such as those with strong sustainability practices or diverse leadership teams. While many ESG benchmarks exist supported by associated index funds, they tend to favor broad values and cannot be easily customized to meet an individual investor’s nuanced preferences. But by using active management, investors gain complete control of the underlying investments they make.

It’s important to note that these reasons may not be enough to justify the additional fees and expenses associated with active management. Since, over time we know that most active managers underperform their passive benchmarks.

So before pursuing active management, investors should carefully consider their goals, risk tolerance, and the potential costs and benefits of active versus passive management.

Is active management fun?

If you enjoy investing and find it to be a rewarding hobby, this alone could be a good reason to actively manage your portfolio. Active management can be a way to stay engaged and motivated in your investment strategy, and it can provide a sense of satisfaction and achievement when you make successful investment decisions.

However, it’s important to remember that active management can also be time-consuming and can carry additional costs, such as higher fees and trading expenses. In addition, active management requires a certain level of knowledge, skill, and expertise to be successful, and not all investors may have the necessary experience or training to make informed investment decisions.

Active management best practices

If you do decide to actively manage your portfolio, it’s important to do so with a disciplined and systematic approach. This may involve setting clear investment goals, developing a well-diversified portfolio, conducting thorough research and analysis, and adhering to a consistent investment strategy. It’s also important to continually monitor and adjust your portfolio as market conditions and your own circumstances change.

Alternatively, if you don’t have the time or inclination to actively manage your portfolio, a passive investing strategy may be a better fit. Passive investing involves tracking the performance of a broad market index or investing in low-cost, diversified index funds or exchange-traded funds (ETFs). Passive investing can be a simpler and more cost-effective way to invest, while also providing the same (or usually better) opportunities for long-term growth and wealth accumulation.