Pros and Cons of Active Management

Using active management techniques is a strategy that many investors try to pursue. This type of investment management has its benefits but also has a few drawbacks as well. Here are some of the pros and cons associated with active portfolio management.

Pros

Being an active investor has its benefits. For one thing, you are going to become much more aware of your portfolio and how you can improve it. Many investors that invest passively have no idea what is in their portfolios and they have no idea how to improve. By becoming an active investor, you are going to be able to take a much more "hands on" approach to handling your portfolio. 

By actively managing your investments, you will also be able to secure more profits. In many cases, the value of your investments is going to increase. Passive investors do not care whether the value increases in the short-term. Instead, they are only focused on the long-term and steady growth. By actively managing your portfolio, you will be able to take advantage of smaller increases in value. When one of your investments increases in value, you can lock in the profits by changing your exit criteria or closing out the trade. 

Cons

Even though this strategy has a few benefits, there are several disadvantages as well. For one thing, you are going to have to deal with higher transaction costs. When you are the type of investor that trades frequently, you are going to have to worry about the additional money that is going to be spent in commissions. Individuals that buy and hold stocks are only going to have to pay a fraction of the transaction costs that active traders do. 

When you are worrying about transaction costs, sometimes you are going to make trading mistakes. For example, if you know that a certain percentage of your trade is made up of transaction costs, you might stay in a trade longer in order to try to make up the difference. In some cases, the trade could turn against you and end up losing.

Another disadvantage to this strategy is that you will end up trying to time the market. There are mixed theories among the experts as to how effective market timing actually is. Many times, you will try to time the market and make the wrong decision. For example, you might think that a stock has increased as much as it is going to. Because of this, you liquidate all of your shares and put the money into another stock. Shortly after that, the stock that you just sold continues to increase to levels that you did not believe were possible.

Other times, investors will sell their shares of stock after a large loss. Instead of waiting it out to see if the stock can turn around, they take the loss and end up losing a substantial portion of their portfolio.

blog comments powered by Disqus
Scottrade