Many financial service firms offer an approach based on “active management.” Active management assumes that the markets are generally inefficient, allowing clever individuals to regularly exploit and profit from the anomalies. And yet, there is overwhelming academic evidence that the collective wisdom of all market players – especially in today’s electronic era – results in highly efficient markets. Markets reflect fair pricing almost instantaneously upon release of any good or bad price-related news.
We heed this academic wisdom and offer a “passive management” approach. Experience tells us that the opportunities to exploit market inefficiencies are too few and far between to effectively and affordably pursue. Many investors realize that a passive investment approach offers many benefits when compared with an active investment approach. Passive investing involves buying and holding market components, whereas an active investor or fund manager tries to pick the next winning stock or time where the market is headed next. A passive approach offers these major benefits:
- By holding entire market components, one maximizes the benefits of diversification
- By “tilting” the portfolio to riskier or less risky components, the investor can expect to capture the highest expected return given his or her risk tolerance.
- The investor maintains control over his or her own portfolio’s components (by avoiding active funds’ tendency to style drift without the investor’s knowledge)
- Expenses can be minimized
- Tax efficiency can be maximized