Whether You Like It Or Not, You Are An Active Investor

It seems as though the active versus passive investment debate has been distorted in such a way that people are confusing stock picking with portfolio management decisions.

Stock pickers have always been characterized as active investors and are justifiably demonized for their inability to beat a benchmark index. They are cursed by their inability to select the right areas of the market at the right times and experience spotty periods of outperformance and underperformance.

Conversely, there is a narrow perception that anyone who invests in ETFs is now a passive investor and should feel smug confidence in this distinction. You can hold your head up high because you aren’t overpaying for weaker performance than the benchmark.

I’m here to tell you that no matter what you see when you look in the mirror – you are an active investor.

Let me explain why….

Even if you don’t believe in timing the market in any way, there are a hundred small decisions you need to make to construct even the most basic ETF portfolio. Some of these include:

1. What percentage of your portfolio do you put in stocks, bonds, commodities, or cash?
2. How do you divide up your U.S. versus international exposure?
3. How do you select one ETF versus its peers?
4. What allocation do you give to each holding?
5. When do you add money and if so, what funds do you add it to?
6. When and how do you rebalance these holdings as they change over time?
7. How do you reduce your risk tolerance as you age or your life needs change?

The list goes on and on. Each one of those questions requires an active decision on your part to implement within your account.   If you aren’t doing it yourself, then an investment advisor or automated service is implementing those decisions on your behalf.

Make no mistake – even a robo advisor has a panel of humans who are involved in the ETF selection process. While they use simulations and models to construct their portfolios, they aren’t turning over full control to the computers.

In some ways, this has given active portfolio managers a bad rap. I have always touted my investment advice as an active solution because I have the flexibility to make changes to many facets of my client accounts. That doesn’t mean I’m out there trying to buy and sell esoteric uranium ETFs on a whim. I’m simply shaping the individual components of the portfolio according to the clients’ risk tolerance and areas of perceived value in the marketplace.

I’ll admit that there is plenty of room for error in my investment philosophy. That is the case with virtually any strategy that you come across. There are always going to be pros and cons when implementing a decision plan. Even “buy-and-hold” investors should know this, as not doing anything is a decision in itself.

The Bottom Line

I continue to advocate using low-cost ETFs to construct a diversified and balanced portfolio is the best course for the majority of investors. In doing so, you must take responsibility for being an active participant in the market despite any preconceived notions to the contrary. That may ultimately put in perspective how difficult this investing game is even under the best of circumstances.