Active vs. Passive Management
Active management can be thought of as any strategy that uses human discretion to decide what the portfolio should own. The manager(s) generally employs some combination of fundamental, quantitative, or technical research in conjunction with their experience, knowledge and judgement to try to find opportunities greater than the market. The fees are typically higher than passive as you are paying the managers for their work.
Passive management is often synonymous with Index investing. By simply investing in the holdings of the index the strategy follows, the buy and sell decisions are not discretionary but rather based on the rules of the index. If an index fund that you invest in enters a period of failure, then your portfolio will also succumb to the market failure. Costs are typically low as there is little management of the portfolio.
Tactical [tak-ti-kuhl] Adjective1
- any mode of procedure for gaining advantage or success.
- a maneuver or plan of action designed as an expedient toward gaining a desired end or temporary advantage.
How does Tactical apply to investing?
Tactical management is a type of active portfolio strategy that shifts the percentage of assets held in various asset classes, sectors or individual investments to take advantage of opportunities as they present themselves. Tactical is also unique in that in times of market duress, tactical managers seek to protect the assets by raising cash, shifting into other asset classes or geographies, or using other types of defensive mechanisms to avoid large losses.
The portfolio construct can change significantly based on the market environment. In a positive or even sideways market, tactical managers tend to stay fully invested. But when markets turn bad, tactical is engineered to sell and get defensive until the markets are through correcting and begin to turn positive.
Tactical is what most investors think they are getting when they buy an active mutual fund. Investors expect growth in "good times" but also expect the portfolio manager to protect their investment when markets are failing.
Unfortunately, most active managers do not incorporate this loss avoidance into their process and are unable to meet these expectations. Tactical managers can and make it a focus.
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