Investing/Managment/Frequent Questions

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Frequent Questions

What is the difference between an advisor and a money manager.

Advisors give advice, for example they recommend buying ABC mutual fund. Managers make investment decisions for the mutual fund. For example, they determine which securities are bought and sold by the fund.

Can advisors and managers be the some person?

Yes, Some advisors take discretion and make investment decisions for their clients. In this case, they are acting like money managers when they invest in the securities markets. 

Are active and passive the only two investment processes?

You can also do both. Use active for some asset classes. Use passive for other asset classes.

Why do some advisors recommend active and passive?

They may want to lower your overall expense with passive managers. They may also use passive management for efficiently priced asset classes - for example, large capitalization value stocks.

Why do active managers go in and out of favor with the markets?

One reason is valuation. The market (all investors) believes the prices of large cap value stocks are too low. The market buys value stocks which drives prices up. The superior performance stops when the market believes the asset class is fairly valued.

Why do most advisors promote active management?

The high expectations created by active management are an easier sell. They make more money when they sell expensive, actively managed investment products.

What are the keys to superior active management results?

Your advisor must be a real investment expert. Your advisor must recommend the best investments for your assets.

Why do some investors prefer passive management?

They were disappointed by advisors who sold them superior performance and failed to produce competitive returns. They do not believe advisors can outperform the market, net of expenses, over longer time periods.

Why is active management riskier than passive management?

Active managers take additional risk to beat the performance of the markets (index funds). You lose if they lag in rising markets. You lose again if they lose more in falling markets.

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