Investment Process

7: Management Style

The way to develop a management style is to undertake the hard work of changing your behavior.

Management Style is the method and philosophy followed by an investor in managing an investment portfolio. The management style of investment portfolio set expectations for risk and performance potential. For many people who are new to investing, the investment world is a complex environment littered with difficult definitions, complicating economic concepts and hard to understand financial jargon. It is important to understand the basic approach that an investor wishes to take, Active Investing or Passive Investing. What are the main differences between the two approaches, and which is most suitable for the investor?

In essence, in active management, there is a selection of assets in preference to others with fast asset reallocations according to timing, gains, stop-losses, market risk or a defined math strategy (algorithm). At active management, there is market analysis in order to identify and purchase investments that are undervalued and to sell investments that become overvalued. The main benefit is the use of skill to find hidden value and exceptional future growth prospects. Usually, active management is more expensive in research, human resources, and transaction costs.

Passive management reflects the market or a market sector as a whole, and so does not depend so much on human resources to make the right decisions. It is a very straightforward way to match an index. It buys the same assets as are in the index, in the same proportions as they are weighted in the index. It is an intelligent decision to create a diversified portfolio with low transaction costs.

We analyzed the performance of 10 levels of volatility in 20 portfolios, 10 active and 10 passive, for a series of 28 years using 12 different assets. We got the following results:

ANNUAL AVERAGE RETURN

MAXIMUM AND MINIMUM RETURNS

VOLATILITY LEVELS

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