Managing your mutual funds: Active vs. passive


Passive management is an investment strategy that attempts to replicate the returns of an index or benchmark by owning the same assets, in the same proportions, as the underlying index. Active managers attempt to outperform the market through the art of stock picking and market timing.

Key Points

A When looking at mutual funds as a component of an overall investment plan, many criteria distinguish one fund from another. These criteria include asset class (stocks, bonds, international, and industry sectors), load or no-load (sales charges and/or commissions), and management style. From the standpoint of management style, mutual funds are generally categorized as being either actively or passively managed.

In contrast to the passive buy-and-hold approach, active managers attempt to outperform the market through the art of stock picking and market timing. For example, the active large cap manager would try to pick a limited number of the best (in their opinion) stocks, be they 50 holdings or a couple hundred of those S&P 500 holdings, for inclusion in their mutual fund. Investors choose these actively managed stock market funds that utilize various stock selection strategies in order to potentially gain higher rates of return in relation to the market indices.

While it's human nature to want to perform "better than average," in the investment world, beating the average is extremely difficult, especially on a consistent basis. Successful active investing requires that managers identify market inefficiencies, and that investors or their financial advisers can identify the managers who do this on a regular basis.

Successful active managers generally feel that as the market retreats, the actively managed funds will be in a better position to minimize losses through the selling of various holdings and moving either to cash or buying quality companies at discounted prices, thus enhancing the funds' long-term performance results. But to support necessary research and an active trading infrastructure, actively managed funds spend more money in overhead and staffing, costs that may be reflected in the higher fees charged by active managers, thus making it even more difficult to beat the market averages.

As academics and investment experts continue to debate the merits of active and passive investment management, it's important that you base your own decision on a careful analysis of your investment goals and risk tolerance.

Q My attorney suggested I use a friend or family member as the executor of my estate. Does this make sense?

A Family and friends are more likely than professional executors (such as bank trust companies) to be sensitive to your beneficiaries' needs. Keep in mind that if you choose a trustworthy, detail-minded friend or family member as your executor, he doesn't have to do it all on his own-he can enlist the services of paid advisers such as accountants, attorneys, and financial planning professionals. Because executors can seek assistance, your best candidate would be someone who is well organized, experienced in maintaining records, and has some business or finance knowledge.

If you don't know anyone with these qualifications, you may want to consider a professional executor. One benefit to using a professional is avoiding potential family conflict caused by choosing one relative over another. A second is that the professional executor can be objective and non-emotional when dealing with family matters.

Joel M. Blau, CFP, is president and Ronald J. Paprocki, JD, CFP, CHBC, is chief executive officer of MEDIQUS Asset Advisors, Inc. in Chicago. They can be reached at 800-883-8555 or

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