Smart investing is much more than going “passive” or “active”

It’s perhaps understandable that many investors and investing professionals today think it best to invest passively – buying and holding funds or securities with the intent of hanging onto them for years. After all, some active investors took a serious hit during the 2008 financial crisis, and those memories have stuck around. Moreover, fund sponsors managing defined benefit (DB) or defined contribution (DC) retirement plans face a more complex regulatory environment, making such simple investment decisions like that more attractive.

Here at Russell Investments, however, we say: Not so fast. We certainly think passive investments have a place as part of a well-designed portfolio. But that’s only if they make sense in the context of the portfolio’s goals as determined by the investor’s desired outcome. Moreover, keep in mind that making a passive investment is itself an “active” decision – one that could have large implications for an investor. In fact, my colleagues just wrote about this for institutional investors.

Instead, we advocate strongly for an active investing approach that employs a multi-asset strategy. Let me briefly break that down for you:

We think active investing is the best way to take advantage of changing market conditions. We don’t “set and forget” – our portfolio managers constantly monitor market conditions to make any needed adjustments to exposures. Passive investments, on the other hand, generally go with the flow. That’s fine if markets are rising, but usually not so good on the downslope. We modify portfolios to take into account whether we’re in period of rising markets, or falling ones. And we seek new opportunities when they arise.

We match that approach with our belief that intelligent investing is multi-asset investing. To us, that means much more than simply buying a basket of assets – such as some equities, some real estate, and a set of commodities. Of course we do that, but then we add sophisticated analysis across asset classes, finding potential opportunities that others overlook. And we hire “best-in-class” external investment managers who, based on our research process, feature particular specialties and who give us superior insight into specific assets.

In short, the discussion about whether to be a passive or active investor misses the point; it takes multiple active decisions to attain the outcomes desired by investors. That includes a decision on how to allocate passive and active investments. But our work goes far beyond that, building portfolios that respond to markets, finding hidden opportunities, and taking a global outlook.

Read more about this perspective in my article Investing today: Why active vs. passive is passé.