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Flexibility and adaptability
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Customization and personalization
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3
Performance and value
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Diversification and risk management
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5
Innovation and learning
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Satisfaction and enjoyment
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Here’s what else to consider
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Active portfolio management is a strategy that involves selecting and trading securities based on market analysis, research, and forecasts. Unlike passive portfolio management, which follows a predetermined index or benchmark, active portfolio managers aim to generate higher returns or lower risks than the market average. In this article, we will explore some of the advantages of active portfolio management and how it can benefit your financial goals.
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1 Flexibility and adaptability
One of the main advantages of active portfolio management is that it allows you to adjust your portfolio according to changing market conditions, opportunities, and risks. Active portfolio managers can use various tools and techniques, such as market timing, sector rotation, asset allocation, and hedging, to exploit market inefficiencies, capture price movements, and protect against losses. By being flexible and adaptable, active portfolio managers can also take advantage of niche markets, emerging trends, and new innovations that may not be reflected in passive indices.
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2 Customization and personalization
Another advantage of active portfolio management is that it enables you to customize and personalize your portfolio according to your specific needs, preferences, and objectives. Active portfolio managers can tailor your portfolio to match your risk tolerance, time horizon, income requirements, tax situation, and ethical values. For example, you can choose to invest in socially responsible, environmental, or impact funds that align with your values, or you can avoid certain sectors or companies that you deem undesirable. You can also adjust your portfolio to suit your life stages, such as saving for retirement, college, or a major purchase.
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3 Performance and value
A third advantage of active portfolio management is that it strives to deliver superior performance and value for your investment. Active portfolio managers seek to outperform the market or a specific benchmark by identifying undervalued or overvalued securities, generating alpha (the excess return over the expected return), and minimizing fees and costs. Active portfolio managers also add value by providing professional expertise, research, analysis, and advice that can help you make informed and confident investment decisions. Additionally, active portfolio managers can provide you with regular feedback, reports, and communication that can enhance your understanding and satisfaction with your portfolio.
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4 Diversification and risk management
A fourth advantage of active portfolio management is that it can help you diversify and manage your portfolio risk. Active portfolio managers can diversify your portfolio across different asset classes, sectors, regions, styles, and strategies that have low or negative correlation with each other. This can reduce your exposure to market volatility, systemic risk, and unsystematic risk. Active portfolio managers can also manage your portfolio risk by using various methods, such as stop-loss orders, limit orders, options, futures, and swaps, to limit your downside potential, lock in your profits, or hedge against adverse price movements.
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5 Innovation and learning
A fifth advantage of active portfolio management is that it can foster innovation and learning for both the portfolio managers and the investors. Active portfolio management encourages portfolio managers to constantly research, analyze, and evaluate new information, data, and ideas that can improve their investment performance and strategies. Active portfolio management also stimulates investors to learn more about the market, the economy, and the companies they invest in, as well as their own investment behavior and psychology. By being more involved and informed, investors can develop their financial literacy, skills, and confidence.
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6 Satisfaction and enjoyment
A sixth advantage of active portfolio management is that it can provide you with satisfaction and enjoyment from your investment experience. Active portfolio management can be rewarding and fulfilling, as you can see the results of your portfolio managers' efforts, decisions, and skills. Active portfolio management can also be exciting and fun, as you can participate in the dynamic and diverse world of investing, discover new opportunities, and challenge yourself. Active portfolio management can also give you a sense of control, ownership, and responsibility over your portfolio, as you can influence its direction, composition, and performance.
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7 Here’s what else to consider
This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?
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