JUNE 23, 2020

Passive vs. Active Investing

In general, there are two approaches to investing that people will consider; a passive approach or an active one. When an investor utilizes a passive approach, they will typically do so by purchasing funds that track the performance of various indexes such as the S&P/TSX (Canada) or the S&P500 (US). They tend to have cheaper fees because they make no attempt to do anything other than imitate index performance.

An active approach, on the other hand, typically involves hiring an investment team to oversee your finances. An active approach is concerned with strategies that offer protection when the market goes down, reduces the magnitude of the bumps in the portfolio, and have the potential to do better than a passive approach. An active manager also looks for underpriced investments (i.e. so they can “buy low”) while taking profits on ones that have become expensive (i.e. “selling high”).

So while Jack has opted to take the passive approach, with no thought given to what lies around the next bend, Robert’s active approach seeks to smooth out and anticipate future opportunities and challenges.

Consider recent events. Who would have guessed the impact COVID-19 would have on all of our lives several months back? The impact on the investment markets back in February and March were significant. Passive investors like Jack, who were invested in indexes found their portfolios bearing the full brunt of those declines (-33.58% for the S&P/TSX1).

An active investor like Robert was able to remain calm through the storm, knowing that:

1. His portfolio was in high quality, well researched investments,
2. The portfolio managers managing those investments were finding new inexpensive investment opportunities to purchase as a result of the decline, and
3. His guides at LGK Wealth Management remained in regular contact with him throughout, to help explain and provide reassurance about what was happening.

1 https://ca.finance.yahoo.com/quote/%5EGSPTSE/history?p=%5EGSPTSE): Time Frame for Calculation: February 21,2020 to Friday March 20, 2020)

Changing Paths

Consider another aspect to long term investing for both Jack and Robert; life changes. In keeping with our hiking trail analogy, sometimes our way becomes blocked and we need to change the path we’re on and forge a new one.

In circumstances such as these, Jack, our passive investor remains on his own to figure out what the best course of action is for him. Robert, on the other hand has LGK Wealth Management to guide and advise him on strategies that can and should be changed. Those fallen rocks, felled trees, and forks in the road are an inevitable part of life’s experiences. So as the path changes an active manager can help to find the best route through the brush.

One final thought; this active guide that Robert has hired is also much more than an individual or team that selects an actively managed portfolio.

The Advantages of an Advisor

In addition to the active management approach to portfolio management that LGK offers, there are so many other aspects of guidance they provide. Services include building strategies that take into consideration an individual’s:

• Retirement goals
• Current and future cash flows
• Risk tolerance and investment beliefs
• Life changes that effect previously designed strategies and goals
• Taxes and estate issues (from a high level)

When it comes to all of these factors, Jack walks the path alone. Robert on the other hand walks with a guide, and with that guide he can be as active as he likes, while at the same time, also has the opportunity to look around and enjoy the scenery.

If you’d like to discuss this topic further or if you’d like us to perform a review of your portfolio in addition to your goals and objectives, please call us at (780) 426-2400, or e-mail us at gkoss@stroudagencies.com to schedule an appointment.