The Answer Is Active AND Passive Strategies: A Blueprint for Financial Advisors

Executive summary:

  • The debate over whether active or passive strategies are superior has persisted for decades
  • Both hold significant benefits for an investor; there is a growing argument that both deserve a place in a diversified portfolio
  • Combining passive and active strategies in a portfolio can offer benefits not provided by either alone

In the ever-evolving investment landscape, one thing has persisted for decades: the debate about the superiority of active or passive strategies. While many pundits strongly advocate for one approach over the other, there are now valid arguments that a combination of both active and passive strategies offer portfolio benefits not provided by either alone. In this blog, we will highlight the advantages of integrating these two strategies and explore how financial advisors can harness the benefits to better serve their clients' investment needs.

Understanding active and passive investing

Before reviewing the benefits of combining active and passive investing, let's define each strategy:

  • Active investing: Actively buying and selling securities, attempting to outperform the market or an assigned benchmark. Active managers rely on research, analysis, and their judgment to make investment decisions. While potentially offering higher returns, active investing also comes at higher costs and risks.
  • Passive investing: Passive investing attempts to match the performance of a specific market index or benchmark. Instead of attempting to beat the market, passive investors seek to match its returns. Passive exposures typically are acquired through low-cost mutual funds or Exchange-Traded Funds (ETFs).