Column: Active versus passive management

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Commentary by Adam Cmejla

If you have money in the market, specifically in mutual funds or exchange-traded funds, you may be wondering: Should I use index or actively-managed investments?

While everyone’s situation is different, let’s take a look at the difference between active and passive management.

The first concept to understand about active management is that there are two broad-level ways to manage investments and they involve fundamental and technical analysis of the market and investments.

Fundamental analysts consider such things as the past records of assets, earnings, sales, products, management and markets of a company in order to try to predict a company’s future success or failure. This would include analyzing the financial results of business decisions made by management.

Technical analysis, on the other hand, is concerned with analyzing the price movement patterns of a company’s securities.

Technical analysts use charts or computer programs to identify and project price trends in a market, security, fund or futures contract. They are attempting to predict future price movements based upon past price movements, and the underlying fundamentals are not important or taken into consideration.

In summary, fundamentalists try to assess the “true” value of a stock, assuming that the market price will eventually adjust to the intrinsic or true value, while technicians try to predict the price movements of the stock and don’t care about why the price will move.

What is interesting about both of these measures is that they are both trying to predict the future movements of the markets based on current data. The equivalent is also true of a weather forecaster: using current and past data, they are trying to predict the weather tomorrow, this weekend and next week. Moreover, they are also trying to “one up” the next station. I have seen the 10-day forecast be “one-upped” by the 14-day forecast, and I have even seen forecasters put out 21-day reports.

In the end, though, it’s better served for investors if they have the “proper equipment” for whatever the weather brings: umbrella, sunscreen, a sweatshirt, a pair of shorts and a windbreaker.

The equivalent in portfolio management is to ensure that you have a well-diversified and allocated portfolio, ready to capitalize on most any market situation and circumstance. But it’s important to note, though, that asset allocation and diversification does not guarantee there won’t be any losses.

Just remember to control the factors that you can control: fees and expenses. Let the markets do the rest.

Adam Cmejla, CMFC® is President of Integrated Planning & Wealth Management, a comprehensive financial services firm located in Carmel providing comprehensive retirement planning strategies to individuals near or in retirement. He can be reached at 853-6777 or adam@integratedpwm.com.

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