How to start investing – Active management strategy

Once an investor has established the ideal asset allocation that best fits their profile, one of the next steps should be deciding between an active or passive management strategy. It is important to understand the advantages and disadvantages of each investment style in order to decide which route you want to take.

In this article, we will delve into active management, where we elaborate on its advantages and disadvantages.

Active management

As the name implies, active management involves more involvement and dedication in managing your portfolio and aims to outperform stock market returns. Usually, indexes are used, such as the S&P500, to obtain a kind of target or standard to surpass.

Advantages

  • Opportunities – Since active management involves a constant search for better returns to outperform the indexes, it is possible to find opportunities for well above average returns.
  • Flexible – Active managers do not try to replicate a particular index, so this freedom allows them to create a tailored portfolio. They can build a portfolio focused on dividends, with a certain time horizon in mind, or even invest in business areas that the investor is particularly well versed in.
  • Bear & Bull – Thanks to the flexibility of active management, an investor doesn’t need to wait for bull markets to start making gains. He can also, through some financial products, monetize the market’s own devaluations.

Disadvantages

  • Costs – Because of the need to execute more trades in order to take advantage of certain opportunities, active management increases operating costs. These increased costs will reduce possible profits, so it is important to consider the costs of active management.
  • Time/Knowledge – The time and knowledge required to maintain active management are reasonably greater than passive management. Given the higher risk in this type of management, more knowledge and time commitment to the markets is essential.
  • Risk – This type of management tends to be riskier. Looking for new “raw” opportunities and a strategy can lead to higher gains, but also excessive losses.

For whom?

This management requires a more experienced investor, who will have to execute a greater number of decisions. Decisions are based on more complex and in-depth analysis, which in turn requires an investor willing to dedicate more time to managing his or her portfolio.

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