Methods

Broadly speaking, there are two types of investment styles: Passive and active, each with several substyles.

Passive Investing 
The main characterization of passive investing is that the manager does not make investment decisions based on forecast of the asset price movements.  The underlying belief is that the market is efficient in that pertinent information regarding the price movement should already be incorporated in the asset price. Thus, a minimally managed portfolio with a low cost is best for investors. Within this style, there are many different kinds of funds related to different categories of assets such as equities, bounds and real estate which can be divided into even smaller subcategories.

The most attractive features of a passively managed fund are low cost and faith in tracking or outperforming the general market behavior of the corresponding class of assets, usually represented by a relevant index stipulated by the fund manager. An investor needs to do their own due diligence and decide on their individualized allocation of investment capital into different categories assets. She also needs to decide on how to distribute (e.g. dollar averaging or lumber sum) according to their concrete situation.

Active Investing

 

In contrast to passive investing, the manager of an actively managed fund uses her expertise to try to `beat the markets’. There are different substyles including fundamental and technical approaches.

A fundamentalists (e.g., Warrant Buffet) bases her decision on the intrinsic value of the assets. A technicians on the other hand focuses on the trends of the asset prices formed due to the imbalance of supply and demand. Among technicians, there are different approaches. Some try to follow the trend, some try to counter the trend, and others try to develop market neutral strategies.

Typically, an actively managed fund incurs higher fees including an initial enrollment fee and a fixed percentage of the total capital under management each year. The total percentage of the combined fee from your financial advisor and fund managers usually range from 1-4%. It is important to taking into consideration of these fees when assessing the merit of an actively managed fund. Moreover, it is important to examine the long-term performance of the fund manager rather than one or two years stellar returns.

Leave a Reply