Active investment strategy involves a professional investment manager or team actively selecting and managing a portfolio to achieve returns that exceed the market average. Based on in-depth market research and analysis, the manager proactively selects and buys securities, striving to achieve returns that exceed the market average.
In contrast to passive management (such as index funds), active management relies on the investor's research, market analysis, and judgment to identify potential investment opportunities. Active investment management offers greater flexibility, but also requires greater expertise and experience.
Pros and Cons of Active Portfolio Management
- Pros
Active portfolio management can more effectively respond to market fluctuations by continuously researching and analyzing the market and making timely adjustments to the portfolio's asset allocation. This strategy can reduce investment risk while improving portfolio returns. Furthermore, by continuously adjusting asset allocations, active portfolio management can provide investors with a better investment experience, increase trust, and ultimately improve client retention.
- Cons
Active portfolio management requires significant research time and specialized knowledge and skills. High management fees are also a significant drawback of active portfolio management.
Furthermore, since investors must frequently adjust their portfolio's asset allocation, this approach can lead to overtrading and tax issues.
How to effectively manage an active portfolio?
Before engaging in active portfolio management, investors should fully understand market trends and investment risks, and research the characteristics of different investment instruments. Common management techniques include:
- Regularly Review Asset Allocation
Investors should regularly review their portfolios, evaluate the performance of different assets within them, and then determine whether adjustments are necessary. Asset allocation requires a balance between risk and return. To effectively manage risk, investors should control the proportions of various asset classes within their portfolios.
- Determine Objectives and Risks
Investors should determine their investment objectives and consider their risk tolerance to optimize their asset allocation to meet their investment objectives and risk tolerance. In practice, investors can diversify their risk while achieving their objectives by selecting a diverse range of asset classes and styles.
- Monitor Market Dynamics
Another key element of active management is market timing. Managers closely monitor market trends, using technical analysis and market sentiment indicators to identify optimal entry and exit points. This strategy requires managers to react quickly to market fluctuations to maximize investment returns.
Comparison of Active and Passive Management
Active management and passive management are two major investment strategies, each with its own advantages and disadvantages. The following are the key differences between them:
- Investment Strategy:
Active management: Through the research and judgment of professional investment managers, securities are actively selected, seeking to outperform the market.
Passive management: Typically, the goal is to track a market index, employing lower fees to construct a portfolio by replicating the index.
- Expenses:
Active management: Management fees are higher because it requires in-depth research and analysis.
Passive management: Management fees are lower because it is relatively simple to operate.
- Risk and Return:
Active management: Potential returns are higher, but also carry greater risk and can result in greater volatility.
Passive management: Relatively lower risk, with returns generally comparable to the market benchmark.
Classification of Active Management Investment Strategies
- Value Investing: Seeking undervalued stocks, holding them for the long term, and waiting for their value to return.
- Growth Investing: Investing in companies with high growth potential, such as technology and biopharmaceutical companies.
- Hedge funds: Utilize a variety of investment strategies, including long, short, and arbitrage, to pursue absolute returns.
- Quantitative investing: Utilizes mathematical models and computer programs to conduct large-scale data analysis and make investment decisions.