Active Or Passive Investing In Retirement – It Depends!

You get up in the morning and look in your closet.  What will you wear today?  It depends.  Do you put your bike on top of the car or your skis?  It depends.  How will the climate you are in or anticipating, impact what your plans are for the day.  There are lots of variables to consider.

Do you want your investments to be attired in an active management style or a passive one?  It depends.

How are they different, what does it depend on and why?

The primary goal of passive or “Index” investing is to earn a “market return”.  An index fund is a type of mutual fund, exchange-traded fund or unit investment trust whose objective is to mimic or replicate the performance of a specific market indices.  There are approximately 5,000 US indices and multitudes more if you look internationally.

Benefits of passive investing include:

• Very low internal expenses (also known as the expense ratio) Because there is no managerial oversight, no one is “picking individual holdings”, the cost is much lower
• Transparency – Always clear on what is held within it.  It is always buy and hold within the “Mandate” of the Index fund.
• Tax efficiency – Because they are buy and hold (no turnover), they work like and individual stock in that the capital gain or loss is not “realized” by the individual until the holding is sold.
• Risk Management – in that you are spreading your total risk over a broad market. This does not protect you from systemic market risk

The primary goal of active investing is that an investor can achieve an overall better return by actively buying and selling securities. Because there is research, analysis and other considerations, this strategy entails higher expenses.

Benefits to Active Investing:

• Flexibility – Managers seek out “diamonds in the rough”. They look at an economic environment and discern direction on where the opportunities may lie based on interest rates or sectors of the economy that may be thriving or struggling.  They are doing fundamental research on companies and industries based on national and global economies.   They are not bound by an Index of holdings
• Tax management – You can be dynamic with when to buy or sell holdings. They can tailor tax efficient purchases and sales to mitigate or manage what gets passed on to an investor.  If someone is in the Distribution season of life, this can keep more money in your pocket!  This can work for or against you based on how closely you are working with your advisor and the underlying investment managers.

Key questions to ask yourself:

• What is our current economic climate? Across the world, right now – I see it as stormy with increasing chances of rough weather!  I also know the storms will pass.  When?  That is uncertain.  I do know that innovation thrives in adversity.  The world we have a year from now will look very different and better than the world we live in now.  I call myself a realistic optimist.
• What do you want your money to do for yourself and others? In the fall season of life or the distribution season – you need to address issues around liquidity, lifestyle, longevity and legacy.
• Do you have tax considerations? Given the lower rate tax environment we are experiencing now, as compared to what your taxation to be in the future given how much money our government is currently pushing into our economy.

Make sure you are properly outfitted for the current climate and the type of experiences you want to have throughout your day.  Verify you are looking at the economic, political and taxation elements you are headed in to as well as the life experience you want as you look at your investment management style.  If you are fortunate enough to have a closet full of clothes and some toys in the garage, you have a responsibility to do your dollars differently. Remember, investing involves risk.  Depending on the types of investments, there may be varying degrees of risk.  Investors should be prepared to bear loss, including loss of principal.