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Passive vs Active. It's one of the most important choices an investor must make before putting their funds to work. Here's a high level comparison of the two:
- Active: Actively managed funds employ "experts" to try and outperform their benchmark (e.g. S&P 500 for Large Blend funds) by picking individual stocks. They tend to have higher costs and higher turnover.
- Passive: Passively managed funds invest in most or all of the stocks in a given asset category (e.g. Large Blend) without trying to pick which individual stocks will do better or worse. They tend to have lower costs and lower turnover.
It would be appealing to believe that the "experts" are consistently able to outperform their benchmark. The data, however, says otherwise. Consider:
- Actively managed funds (on average) tend to undeperform their benchmarks by the amount of their fees and expenses.
- Yes - some active funds outperform the market, but this information is not useful looking forward. Past mutual fund performance generally has no correlation to future performance.
Passive investment vehicles enable efficient asset class exposure:
- Risk Management: Passive funds typically invest in hundreds or thousands of companies. If one of those companies becomes the next Enron, there is minimal impact to the overall return.
- Tax Efficient: Passive funds do not incur capital gains as frequently because there is much less churn in the portolio. This means a lower tax bill and more time for your money to compound.
- Low Cost: Because passive funds aren't paying "experts" to constantly buy and sell, the fees tend to be much lower (typically 0.5% to 1.5% less than their active counterparts).
At Argent Wealth Management, we believe our clients are best served by a Passive investment philosophy. We prefer to use Vanguard funds and ETFs (Exchange Traded Funds) in implementing our clients' investment plans.
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