• Active & Passive Investment Management

     

    What do each of these terms really mean?

     

    Provided by MidAmerica Financial Resources

     

    Investment management can be active or passive. Sometimes, that simple, fundamental choice can make a difference in portfolio performance.

      

    During a particular market climate, one of these two methods may be widely praised, while the other is derided and dismissed. In truth, both approaches have merit, and all investors should understand their principles.

     

    How does passive asset management work? A passive asset management strategy employs investment vehicles mirroring market benchmarks. In their composition, these funds match an index – such as the S&P 500 or the Russell 2000 – component for component.

     

    As a result, the return from a passively managed fund precisely matches the return of the index it replicates. The glass-half-full aspect of this is that the investment will never underperform that benchmark. The glass-half-empty aspect is that it will never outperform it, either.

     

    When you hold a passively managed investment, you always know what you own. In a slumping or sideways market, however, what you happen to own may not be what you would like to own.

     

    Buy-and-hold investing goes hand-in-hand with passive investment management. A lengthy bull market makes a buy-and-hold investor (and a passive asset management approach) look good. With patience, an investor (or asset manager) rides the bull and enjoys the gains.

     

    But, just as there is a potential downside to buy-and-hold investing (you can hold an asset too long), there is also a potential downside to passive investment management (you can be so passive that you fail to react to potential opportunities and changing market climates). That brings us to the respective alternatives to these approaches – market timing and active asset management (which is sometimes called dynamic asset allocation).

     

    Please note that just as buy-and-hold investing does not equal passive asset management, market timing does not equal active asset management. Buy-and-hold investing and market timing are behaviors; passive asset management and active asset management are disciplines. (A portfolio left alone for 10 or 15 years is not one being passively managed.)

     

    Active investment management attempts to beat the benchmarks. It seeks to take advantage of economic trends affecting certain sectors of the market. By overweighting a portfolio in sectors that are performing well and underweighting it in sectors that are performing poorly, the portfolio can theoretically benefit from greater exposure to the “hot” sectors and achieve a better overall return.

     

    Active investment management does involve market timing. You have probably read articles discouraging market timing, but the warnings within those articles are almost always aimed at individual investors – stock pickers, day traders. Investment professionals practicing dynamic asset allocation are not merely picking stocks and making impulsive trades. They rely on highly sophisticated analytics to adjust investment allocations in a portfolio, responding to price movements and seeking to determine macroeconomic and sector-specific trends.

      

    The dilemma with active investment management is that a manager (and portfolio) may have as many subpar years as excellent ones. In 2013, more than 80% of active investment managers outperformed passive investments indexing the S&P 500 (which rose 29.60% that year). In 2011, less than 15% did (the S&P was flat for the year).1,2

      

    The two approaches are not mutually exclusive. In fact, many investment professionals help their clients use passive and active strategies at once. Some types of investments may be better suited to active management than passive management or vice versa. Similarly, when a bull market shifts into a bear market (or vice versa), one approach may suddenly prove more useful than the other, while both approaches are kept in mind for the long run.   

          

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

         

    Citations.

    1 - forbes.com/sites/investor/2015/03/30/active-versus-passive-management-which-is-better/ [3/30/15]

    2 - macrotrends.net/2526/sp-500-historical-annual-returns [2/2/17]

     

  • Financial Thoughts for International Women’s Day

     

    Every March 8, we reflect on the financial progress women have made (and still need to make).

     

    Provided by MidAmerica Financial Resources

     

    March 8 is International Women’s Day, a day to celebrate the social and economic progress and cultural achievements of women worldwide.

     

    There really is much to celebrate. Globally, the wealth of women is growing at a faster rate than the wealth of men. The increase was about 8% a year from 2010-15 according to Boston Consulting Group, a global business consulting firm. BCG sees women’s wealth expanding another 7% per year through 2020, with women controlling $72.1 trillion in assets three years from now. Domestically, Census Bureau data shows women now owning more than a third of U.S. businesses.1

     

    Today, women have more opportunity to build wealth than they did generations ago, plus more information and resources to help them plan for that objective – but how many women are taking advantage of all this? More should, especially with their retirements in mind.

     

    Even with all this progress, there may be a retirement crisis in the making. The Department of Labor notes that just 44% of the 63 million employed women in the U.S. participate in an employee retirement plan. Vanguard research shows that while the mean 401(k) account balance for men is around $123,000, it is only about $75,000 for women.2,3

          

    As the DoL points out, today’s average 65-year-old female has a life expectancy of 85. So, a retirement of 20 years (or longer, if a woman retires before age 65) will be normal. If a woman has but $75,000 in a workplace retirement plan – and perhaps, say, $100,000-150,000 in other investments or retirement accounts – will that be enough, along with Social Security and/or a pension, to sustain a comfortable 20- or 25-year retirement? Even if her accumulated assets remain invested in equities, this is doubtful, especially with inflation.2

          

    For single women, the risk is heightened. The Employee Benefit Research Institute’s 2016 Retirement Confidence Survey discovered that roughly 40% of unmarried American women have less than $1,000 in retirement savings.3

     

    If that fact seems unsettling, so is a perception brought to light by the EBRI survey. Approximately 36% of unmarried females responding to the survey felt that they could retire adequately with less than $250,000 in retirement savings – again, a highly debatable assumption. That assumption might prove true for a retirement lasting 5-10 years, like the retirements that were common 30-40 years ago. With today’s longer lifespans, it might prove faulty. (In contrast, a majority of men surveyed by EBRI felt they should save at least $500,000 for their retirements.)3

     

    The bottom line is that many women need to save more, invest more, and prepare more for retirement and its two biggest risks: longevity risk and inflation risk. Longevity risk is the risk of outliving your money. Inflation risk is the risk of gradually losing your purchasing power as consumer prices presumably rise with time.

     

    A woman saving and investing for her future would do well to regularly consult a financial professional along the way. This may be a key step in the pursuit of her retirement goals; a step that could help reveal paths to attaining them.

     

    MidAmerica Financial Resources may be reached at 618.548.4777 or greg.malan@natplan.com. www.mid-america.us

     

    This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

     

    Securities and advisory services offered through National Planning Corporation (NPC), Member FINRA/SIPC, a Registered Investment Adviser.
    MidAmerica Financial Resources and Malan Financial Group are separate and unrelated companies to NPC.

         

    Citations.

    1 - time.com/money/4360112/womens-wealth-share-increase/ [6/7/16]

    2 - dol.gov/sites/default/files/ebsa/about-ebsa/our-activities/resource-center/publications/women.pdf [9/15]

    3 - cnbc.com/2016/03/18/women-more-likely-than-men-to-retire-poor.html [3/18/16]