Investing with the Trend: A Rules-based Approach to Money Management

Appendix APassive versus Active Management

Passive means that the investor or manager does not change the portfolio components except for occasional, usually based on the calendar, rebalancing to some preconceived ratio of stocks and bonds. Passive is prosaic and often is designed just to replicate the market. An active investor or manager is one who attempts to invest in top performing stocks or assets using some methodology to assist in that process. Often it is difficult to tell the difference between some active managers and their benchmark. They have become benchmark huggers, often because of career risk. This is not a complete list, but does address the most popular strategies and while there is some overlap in some strategies, that is not unexpected.

Examples of Passive

1. Buy and hold. The concept of long-only investments is usually based on fundamental research. For decades this was the much touted method to long-term success in the stock market, and, in fact, for most people, that is probably correct, especially if much of their holding period was during a secular bull market. Value investing is generally attributed to this type of investing. Sadly, buy and hold can be devastating during secular bear markets. Five of the strong arguments for buy and hold are:
   1. The market goes up over the long run.
   2. Equity returns will keep you ahead of inflation.
   3. The market always recovers from bear markets.
   4. Commissions, fees, and taxes are kept low.
   5. No one can time the market’s up and ...