Passive investment management may be the Rodney Dangerfield of financial strategies – it gets no
respect. Active investment strategies have had the spotlight so long, some investors may be surprised to
find there is an alternative to stock picking, market timing and other faster-paced, more glamorous
methods.

Active investment management uses research, investigation and analysis to select investments that the
selector believes will outperform the general market indexes. Passive investment management invests in
broad market sectors and accepts the average returns those sectors produce.

The research, investigation and analysis inherent in active investment
management come at a cost. Active management usually results in higher
turnover within the portfolio, potentially generating trading costs, commissions
and taxes. Those costs should be calculated against the higher gains that
active investing may have over a passive strategy; in other words, is the
potential for additional gain worth the near-certainty of additional cost.

Passive investing seeks to take some of the prognostication out of the
investment process, as well as the possible emotional impact. Daily evaluation
and re-evaluation of investments can cause you to overlook more subtle trends
and to lose sight of your personal big picture. It’s easy to get caught up in the
next great investment pick or strategy. Ignoring the hype in favor of the
buy-and-hold tactic may help keep your portfolio on course.

Passive investment management does not, however, mean purchasing
investments and then ignoring them. Your portfolio will need to be rebalanced
periodically to make sure those sectors performing better than expected don’t
become too great a share of your invested assets. Changes in your personal
life – marriage, children, divorce, death of a spouse – may also necessitate
changes to your investment plan.

Neither does it mean foregoing the assistance of an investment professional
or financial advisory team. These professionals should help you determine
your investment goals, the amount of money needed to reach them and the
best strategies for accumulating that money. They play an important role in
keeping you on the right course, especially when deviating becomes most
tempting.

All investments involve risk, whether selected as part of an active strategy or a
passive one. Passive investing does not “loss-proof” your portfolio. On the flip
side, past success is not indicative of future performance, as active-style
proponents might have you believe.

In the end, you have to weigh the lower costs, style consistency and tax efficiency of a passive investment
strategy against the potential greater returns of an active investment strategy. Your financial advisor can
play an important role in helping you determine which style best suits your investment time horizon, risk
tolerance and investment experience.

This article was submitted by Robert Valentine of Financial and Retirement Management.Robert Valentine is a well-known expert in the matters concerning investors. His articles on financial planning matters that concern investors have been published by several publications throughout the United States.