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Many people ask me if they should choose to invest actively or passively. Investing using managed mutual funds is the most common application of active investing. Passive investing means investing in indexes, so the fees are lower and turnover is less. Passive investing has fewer tax implications, but no active management in market volatility.

Over the last few years, we’ve seen very predictable behavior in terms of what people have favored. According to Morningstar, U.S. stock mutual funds had nearly $50 billion in net outflows during the first three months of this year. Over the past five years the total net (going out of the fund versus coming in), has been $690 billion. By contrast, U.S. equity index funds saw more than $90 billion in net inflows in the first three months of this year and $810 billion in net inflows over the past five years. The bottom line is as markets have surged more and more people are exiting managed funds and active management and opting into index funds. In my opinion, this is the classic “chase for returns.”

From the bottom in 2009, the market has surged 250 percent considering the total return of the S&P 500. That’s 250 percent in eight years. When moving towards the tail end of these surges we don’t know when we’re going to have a surge like that again, versus three to four bull runs or bearish runs. We don’t know in advance. When we look back historically, indexing is a great way to invest in bull markets. It’s like sailing down the river. You’ve just raised your sail and have tremendous wind at your back. That wind takes you wherever you want to go and that’s what index investing can do. We also have periods of turbulence and that’s like rowing against the wind on the water. We have to row. We can’t just open our sail.

Active management, depending on how its applied, can have benefits in managing volatility and downside risk. I get asked all the time, “should I use active or passive investing?” Since we don’t know the future why not consider some of both? When I see, people espousing only index investing or espousing only managed investing it seems like a marketing ploy. They make it sound good, but the reality is there are benefits to both. I anticipate turbulence not only over the next six months, but over the next several years. Turbulence is a way of life in markets. If we have more turbulence and choppy waters like we’ve experienced the last eight years, I believe you’ll need both active and passive investment strategies. The markets could continue to reach new highs, which is a good reason to have indexes. Make sure you don’t limit your investment choices. Open your horizons and use the best tools offered by the industry.



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