Wall Street professionals and retail investors have argued over the pros and cons of both active and passive investing for years. Both seem to work well over the long term, and both have helped investors achieve their financial goals. What it really comes down to is suitability. Some people need passive management, some people need active - and the specific style should be recommended by your financial advisor.
What is active investment management? It’s when a manager actively manages your portfolio using individual stocks and bonds, who’s proactive instead of reactive, and allocates portfolios based on the future economic/market outlook. The main goal of active investing is to outperform an equivalent benchmark index. For some funds, outperformance isn’t always the case so proper due diligence is needed to choose the right manager. With active investing the costs tend to be a little bit higher, and this is due to the tedious nature of the investing style along with the possibility of outperformance. At DDIMG, we prefer active investing because our clients are coming to us for a reason. They not only want to outperform their benchmark, they want us to mitigate their risk and want us to be proactive to protect/grow their nest egg. An example of this is when we added precious metal exposure to the portfolios in early summer of 2020. We anticipated the dollar weakening and quickly hedged to capture a healthy return for our clients. We then vacated the position when we didn’t see the dollar index getting lower in order to protect the gain. We can easily justify a client paying us fee for this reason, among others. We cannot justify charging a management fee to outsource the investing to an external party, or solely use index funds. Especially when the client also pays a fee to the external party, usually in the form of a 12 b-1 expense ratio or a separate management fee. That’s double dipping and in our opinion highly unethical.
Now, what is passive investment management? This is when a manager/investor passively manages a portfolio by using index ETF’s & funds designed to track an index such as the S&P 500, Dow Jones or NASDAQ. This strategy is widely used by retail investors we like to call “do it yourselfers”. Unlike active investing, passive investing is more of a “set it and forget it” strategy and is not nearly as tedious. The passive investor will just ride with the index he or she chooses and not really have to focus on anything else. There isn’t any outperforming the market, and there’s no hedging or complex strategies used to protect/grow assets in tricky times. Some financial advisors choose to use index funds/ETF’s exclusively and somehow justify charging their client a management fee when they aren’t even managing the money. The justification usually comes from offering a financial plan - Don’t get me wrong financial planning is highly valuable; but not nearly as valuable as active management combined with the financial planning (in our opinion).
As I said two paragraphs above, DDIMG LLC prefers active investing over passive. We are passionate about combining both active investment management and financial planning to help our clients achieve their long- and short-term goals. We want every single client to achieve financial freedom; we want every single client to not only know when work becomes optional, but what needs to be done ensure they don’t outlive their assets and/or transfer wealth to the next generation. It’s a long-term game and those who understand this should continue to prosper.
