|
Page 1 2 3 4 5 [next page] [previous page]
Defining Terms:
The Holland Investment Primer (cont.)
[Download Printable White Paper]
Let's put it this way: if you've seen the movie "Wall Street," that's a fairly accurate depiction (minus the underhanded shenanigans) of active management. Most active managers literally can't wait to read the business headlines each morning. They're constantly alert for market movements, quarterly reports, the latest rumors
any edge over the next day's closing number.
In this way, active managers might sometimes be called reactive managers.
The slightest change in oil prices, for example, or election results in Indonesia, a hiccup in television sales
virtually any piece of news could prompt an Excedrin Headache
No. 3, followed by frantic buying or selling.
But passive managers and investors are not so easily tossed back and forth. Their long-term asset allocation isn't dependent on any one event, any one stock or sector, or any single day's performance.
Yes, unquestionably, rare seismic global events, such as a 9/11, will rattle the foundations of markets, affecting all types of investors. But even here, a broadly-diverse and properly-allocated portfolio is relatively less prone to catastrophic impact as risk-exposure to specific sectors is minimized.
Ultimately, active managers aim for sudden spectacular performance; passive managers for sustained and reliable (less volatile) returns. Decades of academic and private studies have proven that, over time, diversified passive management (reflecting markets as a whole) has never been challenged by the long-term track record of any active manager.
Most years – because of increased fees and risks – as many as 75% of active managers under-perform the benchmark indexes. But to be fair, you can also find years when some active managers have trounced the S & P 500. Analysts say the problem here is, how can anyone know in advance who'll be the next stock-picking superstar? And
how long will the winning streak continue?
The fundamental question is: what's your goal? If you are investing for long-term financial stability – building wealth – passive management stands on solid empirical ground and decades of performance. It's no coincidence that colossal endowment funds, pension funds and the "Big Money" are diversely invested in passive programs. This
is the proven way to get where you want to go.
What is indexing?
This is a form of passive investment management in which a fund – or an
asset allocation model – reflects a specific range of stocks and/or market sectors. For example, the Dow Jones Industrial Index is a "basket" of 30 very large U. S. companies. The more widely-watched S & P 500 comprises a much broader range of firms.
There are dozens of well-established indexes – some are purely domestic, some international, and others are a combination.
Indexing (as a passive management technique) has proven so successful over
time for so many investors that in the last few years index-plus funds have emerged as a new model. In a recent banner article, The New York Times dubbed these "designer-index funds" with the goal of "turbo-charging" performance.
(cont.)
Page 1 2 3 4 5 [next page] [previous page]
|
