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What is Active Management?


Contrary to Passive Asset Allocation, the portfolio holdings are adjusted on a continuing basis in response to market and economic conditions. Since Modern Portfolio Theory won the 1990 Nobel prize in Economic Sciences, the financial community has adapted passive asset allocation as its mantra and the most popular way to manage risk.


The strategy is for an investor to buy a broad array of assets classes and then hold those assets for an extended period of time regardless of market conditions. That strategy is best known as “buy and hold” or passive asset allocation. This type of strategy is what most financial advisors choose for their clients. However, during the market decline, these strategies still saw significant losses in 2008.


So when the S&P 500 declined 53% and NASDAQ 51%, most asset allocation models declined as well. Morningstar, Inc., a Registered Investment Advisor that builds models for many mutual funds and variable insurance companies, has shown that the benchmark models (models that use the indexes to backtest performance) would have had yielded the same type of losses. Why? Because the overall market declined.


Active Management is when a third-party money management firm has discretionary authority to adjust your portfolio holdings as market and economic conditions change. Some will take your portfolio to cash as a defensive move.


Manage Risk

Active Management is a strategy for investors to manage risk by allocating investments among a broad array of assets classes and adjusting the relative weighting of the different asset classes on an ongoing basis in response to market and economic conditions. It’s important to mention here that this is not market timing but rather a disciplined investment approach. There’s a big difference. Active management involves a written investment policy statement between the client and the firm and is based on objective investment models and facts.

Firms that require a minimum account size have increased their average minimum to almost $500,000.8

85.5% of U.S. Households have a net worth of less than $500,000.9


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