Using an Active Management Approach

In a nut shell, active management is a process where 3 things happen….sometimes all at once.  These 3 actions are Stock Picking, Market Timing, and Track Record Investing.  Let’s talk about each;

Stock picking occurs when you hire an investment advisor or mutual fund company to buy and sell stocks in an attempt to beat the market.

Market timing occurs when you hire an investment advisor or mutual fund company to predict moves in the market.  They attempt to predict when it’s going up and down and make adjustments to the portfolio accordingly.

Tract record investing occurs when an investment manager or mutual fund company makes investment and portfolio decisions based on past performances.   Many investors and plan sponsors assume that because an investment manager has had successful luck in the past he will have the same in the future.  However, the stark reality is a manager’s ability to pick stocks in the past compared with his ability to pick in the future has no direct correlation.

Active investing is a danger because of the speculative approach to the process.

A plan participant can easily believe a fund manager who has returned 20+% returns will continue to do so in the future and invest a significant portion of their wealth into his fund.  He will do this with no regard to the risk, no understanding of the fund objective; or, any knowledge of what is included in the fund, only to learn a hard lesson upon experiencing losses.  Again, academic research has shown that there is no correlation between a manager’s ability to manage a fund in the past and his ability to do so in the future.  This speculative approach to the company plan can lead to discontent among participants, especially during market lows and this is even worse when a participant is near retirement.