Active Advantages Copy

Active Advantages Copy

Still, many financial advisers recommend actively managed investments for significant portions of their clients’ portfolios. Active management includes mutual funds and exchange-traded funds, as well as portfolios of stocks, bonds and other holdings managed by financial advisers. Among the benefits they see:

  • Flexibility – because active managers, unlike passive ones, are not required to hold specific stocks or bonds
  • Hedging – the ability to use short sales, put options, and other strategies to insure against losses
  • Risk management – the ability to get out of specific holdings or market sectors when risks get too large
  • Tax management – including strategies tailored to the individual investor, like selling money-losing investments to offset taxes on winners.

Wharton finance professor Jeremy Siegel is a strong believer in passive investing, but he recognizes that high-net-worth investors do have access to advisers with stronger track records. In that case, a management fee is not as burdensome.

“Obviously, the more money you have the more elite personal-finance advisers you have access to,” Siegel says. “You get more for your 1% because you are going to get better people.”

How does the investor find a top-quality adviser? That’s one of the issues explored in Investment Strategies and Portfolio Management, which also covers topics such as fund evaluation and selecting appropriate performance benchmarks.

As a rule of thumb, says Siegel, a manager must produce 10 years of market-beating performance to make a convincing case for skill over luck.

[SW] Many investors like the having an expert or a team of people looking after their investments, making them feel that there is a greater degree of control being exercised over their investment fortunes. The more famous and popular the investment manager, the greater the belief that this person can drive investors fortunes to the right outcome. History will show that even if certain individuals are able to outperform much of the time, that they are not able to do so always.

In Botswana, the challenge for active managers is greater because of the relatively small size and lower liquidity of the local stock market. This also means that the scope for passive investing in Botswana is limited.