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Active vs. Passive?


There's been an ongoing debate in the investment world for years now on the merits of using low cost, passive index funds vs paying a manager to pick stocks in an actively traded mutual fund. Numerous studies have shown that expenses are a primary driver of fund performance. Funds with lower fees tend to have better performance than those with higher fees. So we have always been very conscious of the "expense ratio" on the funds we use.

That doesn't mean we only use index funds. In fact historically we have leaned heavily on low-cost active mutual funds that have a strong, long-term track record. We follow these funds closely and believe they have management teams in place that provide them the resources to be successful in the future. We don't make rash decisions to sell these funds when they hit a rough spot and our clients have been rewarded over the long run.

Unfortunately it can often be very difficult to stick with an active fund while it is going through a period of under performance. Doubt starts to creep in about their processes and everyone worries that something has changed with the fund and they aren't the same as they always were. This too often leads to investors jumping in and out at precisely the wrong time.

We know the number one determinant in an individuals' investment success is not fees, stock picking, or asset allocation. It is investor behavior. If we as investors could simply stick to a plan and not feel the need to constantly make changes, we would be much better off. Granted, it's important to be diversified, keep costs low and own the right investments. But if we constantly change our minds on how we accomplish those things, our portfolio will suffer.

Owning index funds means you don't have to worry about a mutual fund trailing the market. You won't feel like you need to get out of one fund and into another. You never have to look at your fund compared to the index and realize you trailed by a wide margin this quarter. That makes it much easier to BEHAVE appropriately. If you know you have a tendency to always want to try the new investment fad or pick the next hot fund manager, index funds are probably your best bet.

Look at it this way: If you are an alcoholic, is it wise to spend all your nights at the bar? If you have a gambling problem, should you vacation in Las Vegas? If you are overweight should you stock up your house with candy bars and chips? No, no and NO. The easiest way to change your bad behavior is to make it easier for you to stick to good behavior. The alcoholic stays away from the bar, the gambler doesn't step foot in a casino and the overweight person keeps only fruit and veggies in the house. 

You shouldn't ask, "Is it better to invest in active or passive funds?" You should ask, "Which is better for me?". We don't have an investment model that we try to fit all our clients into, because all our clients are unique. We have some who only use index funds. We have others who take a more active approach. We have even more who use a combination of both. Our goal is to help you build a portfolio that will allow you to stay on track to reach your financial goals.

The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.