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Benefits and Limitations of Active and Passive Portfolio Management Strategies

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A portfolio is an accumulation of projects/programs and other work that is congregated together to enable the effective choice and management of the work undertaken inside the portfolio to meet vital business objectives. As a result, the portfolio management role is a generally perpetual part of the executive management structure, not temporary like programs and projects. The programs and projects inside a portfolio might be mutually or directly related relying upon the manner in which the portfolio is structured. Management portfolio gives the ability to effectively choose, prioritize and oversight the organizations programs and projects to enhance the formation of sustainable value for the organization, in spite of shifting technology, business and economic conditions. Controlling and managing portfolios includes revisiting the critical success factors of each project, including the availability of the resources and the business continued validity, with the business sponsors all the time. Portfolio management is a key connection in the general value delivery chain, and is additionally the connection between procedures and implementation of organizational improvement through the medium of programs and projects. While managing an investment portfolio, an investor has a decision of being hands-on with the funds and securities creating it, or purchase and hold on them. Active is the former management, while passive management is latter.

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Active portfolio management strategy

The prime goal of active portfolio management is to surpass the returns of its underlying bench mark index. The premise behind active management is that a skillful portfolio manager, upheld by a professional investment team, can choose such securities for a portfolio which would exceed returns posted by its benchmark file or some other significant amount of portfolio performance.

Potentially market-beating returns – Active managers trust that they can beat the market by predicting the patterns, political, economy, and other present events, and company-specific aspects such as earnings growth, etc. and investing in hand-picked stocks. When they are correct their intuition and knowledge convert into huge returns, which is impossible if passive strategy was followed.

Flexibility – Active managers have a tendency of having carte blanche over their strategy of investment, whereas passive managers might be tied to a certain index or segment. Active managers can instantly switch from tech stocks to healthcare, if they decide to.

Tax break – Investors with high net worth are happy to lose money, as they are can stake these misfortunes against their taxable income to eliminate their tax bills. This is normally worked into the strategy of investment of the extremely wealthy.

Limitations

Human error – Investment manager can misjudge the market movements or choose a bad stock and possibly wipe a great deal of significant value off your portfolio. This is the reason it is essential that you have complete confidence and prepared to stick in it through good and bad times.

Cost – active funds have extremely high fees, with just sending an annual bill, regardless of whether their strategy has lost money. Over this, active managers also take a cut of any benefits, so while one may think that they’ve made a profit of 10%, after charges and commission it might be a 6% profit. And will compoundly affect a person’s portfolio value after some time.

Minimum thresholds – Top managers can bear to be selective about who they go up against, and many set strong minimum thresholds for potential investors.

Passive portfolio management strategy

The investment idea behind passive portfolio management is built on Efficient Market Hypothesis. This idea hypothesizes that financial markets are efficient pricing-wise. All investors have all the information accessible to them consistently without information from inside which could benefit some but not all fragments of the market. If so, then there is little room, assuming any, for an investor to beat the market accordingly making the active management less effective. This causes the passive portfolio management to focus on decreasing costs by following a purchase-and-hold strategy which involves low portfolio turnover.

Benefits

Cost – Passive investing is possibly the least expensive way to get to the market, with minimal fees and none of the strong commission charges that arises with hiring an active manager. This implies that any cash a person makes is all theirs, aside from a nominal administration fee (regularly under 0.1%).Long-term results- Historically stock market have delivered great results, if a new investor is prepared to invest their money over a long period of time.

Simplicity – Investors know where their money is and what it’s doing in passive investment. They can also remove it and reinvest with relative ease.

Limitations

Stock concentration – Some passive investment strategies are excessively centered on large caps, meaning that an investor’s money might be concentrated on top 100 or 50 organizations in the country. This denies investors chances to be discovered somewhere else in the stock market and leave investor’s money vulnerable.

Volatility – Passive investment is most appropriate to long-term investors who are glad to leave their money set up for at least a couple of years- taking money out when the markets are down is the worst thing to do. Investments undergo full extent of the volatility of the market when market are volatile.

Limited returns – Passive investments are the market, therefore will never beat the market.

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