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Investment Insights: Combining Active and Passive Investments for Optimal Portfolio Performance

September 28, 2023

You will often hear investors touting the benefits of Passive Investments, claiming cost efficiency and consistency as the most important features of an investment. In the other camp, proponents of Actively Managed Funds believe that the risk management techniques and potential for above benchmark returns make the higher expenses of these funds worth the added cost. At Compass Capital Management, we have long believed that incorporating both strategies into our Investment Models allows us to take advantage of the benefits of each to deliver the best results possible.

Passive Investment Strategies involve replicating a market index or benchmark. These strategies typically have lower fees and require less active management. Cost efficiency, diversification and consistency are considered the most important benefits of these investments.

Active Investment strategies involve hands-on management with the goal of outperforming the market. These strategies entail higher fees and require extensive research and analysis. The potential for Alpha (or outperformance), adaptability and risk management are considered the most important benefits of these investments.

One of the advantages of combining active and passive investments includes increasing risk mitigation. While active strategies seek higher returns, passive investments provide stability during market volatility. Another is increased diversification. A balanced portfolio includes a mix of asset classes, geographies and investment styles. Active managers can target specific opportunities while passive investments ensure broad diversification.

Internal fund expenses add to overall portfolio costs. By judiciously blending both active and passive strategies, we can strike a balance between fee minimization and alpha generation. The synergy between active and passive investments can lead to consistent long-term growth, as active strategies capitalize on opportunities and passive strategies provide steady returns.

In today’s complex and ever-changing investment landscape, a portfolio that combines active and passive strategies offers a robust solution. Active Investments aim for outperformance, while passive investments provide stability and cost efficiency. This balanced approach allows investors to harness the strengths of both strategies, enhancing the potential for long-term wealth accumulation and risk management.