PORTFOLIO STRATEGY
Portfolio Strategy is the term used to describe all of the investments and assets a person or company owns. They can include such things as stocks, bonds, baseball cards, real estate, fine art, etc. The strategy that is being used for optimizing the balance between risk, performance, time, and volatility usually describes the Portfolio Strategy.
There are many strategic alternatives to use when investing. Below we will explain how we view strategy and portfolios.
Active Portfolio Strategy
Active management (also called active investing) refers to a strategy where the manager makes specific investments with the goal of outperforming a benchmark index.
Ideally, the manager exploits market inefficiencies by purchasing securities that are undervalued, and/or (less frequently), short selling securities that are overvalued. Depending on the goals of the specific investment portfolio or mutual fund, active management may also strive to achieve less volatility or risk than the benchmark index instead of, or in addition to, greater long-term return. Active portfolio managers use a variety of factors and strategies to construct their portfolio.
These include identifying and using quantitative measures such as P/E ratios and PEG ratios. Sector bets attempt to anticipate long-term macroeconomic trends, such as a focus on energy or housing stocks. They will also purchase the stock of companies that are temporarily out-of-favor or selling at a discount to their intrinsic value. Some actively managed funds also pursue strategies such as merger arbitrage, short positions, option, writing, and asset allocation.
The primary attraction of active management is that it allows selection of investments that do not echo those of the market as a whole. Investors may have a variety of motivations for following such a strategy: They may be skeptical of the efficient market theory, or believe that some market segments are less efficient than others. They may also want to manage volatility by investing in less-risky, high-quality companies rather than in the market as a whole, thereby accepting slightly lower returns. Conversely, some investors may want to take on additional risk for the chance of outsized returns.
Investments that are not highly correlated to the market are useful as a portfolio diversifier.
Some investors may wish to follow a strategy that avoids or under-weights certain industries compared to the market as a whole. They may find an actively-managed fund more in line with their particular investment goals.
Active Management is the opposite of Passive Management, where the manager does not seek to outperform the benchmark index.
Passive Portfolio Strategy
Passive management (also called passive investing) is a financial strategy in which a fund manager makes few portfolio decisions. One popular method is to replicate the performance of an externally specified index—called index funds. Passive management is most common on the equity market, where index funds track a stock market index, but it is becoming more common in other investment types, including bonds, commodities and hedge funds.
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