For decades, finance professionals have argued over the merits and drawbacks of active versus passive investment management, but in today’s world, that debate makes little sense, if at all, according to Ted Lundgren, managing principal of HG Capital Advisors and a member of the board of the National Association of Active Investment Managers (NAAIM).
Yes, Lundgren is a proponent of active management, but only as one part of a comprehensive investment strategy that also includes passive management, because, he says, managers and advisors will only be able to deliver the best to their clients when they properly mix both active and passive strategies.
While active management strategies and the value they can bring enhance advisors’ ability to add alpha, help respond to changing market conditions and overcome losses, they’re actually far more effective when they’re combined with passive strategies, Lundgren argues. That’s because those strategies can add a level of diversification across asset classes and timeframes.
“Our main job is to learn about the client and do what’s best for him, so diversifying across asset classes, methodology and investment styles is extremely important,” he says.
But no investment style, active or passive, can work without an advisor getting to know how their clients feel, think and behave. To that end, any advisor’s approach must be anchored firmly in the principles of behavioral finance, Lundgren says, and they must get to know their clients’ behavioral biases as well as their own in order to then come up with the “money management techniques that help mitigate these.” The trick is to be prepared for any market eventuality that can impact investor behavior and confidence, he says, and the best way to ensure this is to mix methodologies and investment management styles.
Buy and Hold, and Active Management