Active vs. Passive Decision

Active vs. Passive Management

If the decision to handle your own investments is the answer to question #1 in this series, then going Passive is a no-brainer. The evidence for the passive approach to investing is so overwhelming anyone but Warren Buffett taking the active route needs to study statistics. Goldie and Murray write, "The Efficient Market Hypothesis asserts that no investor will consistently beat the market over long periods except by chance." So why take a chance by going the active management account? Investors who perceive they are smarter than the market, be sure to read Rick Ferri's latest book, "The Power of Passive Investing."

If one still insists on picking a few stocks, limit this activity to no more than 10% of the portfolio and then use the TLH spreadsheet to track the performance of your stock decisions. If you find you are able to consistently select good stocks (far different from choosing good companies) then continue the activity. What tends to happen is that luck runs with the investor for a few years and then the law of averages begins to set in and the broad market makes its move and overtakes the active manager.

Here at ITA Wealth Management we are strong advocates of passive investing using a wide array of index ETFs. Our portfolios show how and why we invest as we do.

About Lowell

Retired physics teacher. My hobbies are photography, reading and classical music. And my latest hobby - taking care of my dog, Kipling.

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