A passive portfolio management approach is appropriate for many 401(k) plan participants and individual investors. But indexing isnt right for everyone. Many investors are not satisfied with market average returns. Nor do they feel it makes sense to lock in 100% of every market decline. Many believe they can consistently outperform market averages by applying a little of the right knowledge. Think there is no point to active management? Consider the following to make active management work for your plan participants:
1. Eliminate all closet indexers. Purge
2. Index efficient asset classes. Use passive management for those asset classes that are
3. Hire active managers for inefficient asset classes. These asset classes, where the returns of mutual fund managers can vary significantly, include commodities and international stocks and bonds.
4. Defense is good. Consider that some mutual fund managers are really good defenders of your investments. They may not outperform significantly in up markets but may fall much less than market indexes in down markets. Choose mutual funds that have a down market capture rate of less than 100%.
5. Full market cycle. A major reason many investors abandon active management is they feel every active manager should beat their benchmark every year. This is unrealistic. Review the performance of all your mutual fund managers over a full market cycle.
6. Allocations. Plan participants can use active management to determine their allocations among asset classes.
It is unlikely that the next five years in the equity markets will be anything similar to the last five, raging-bull market years. The risk-on, risk-off market conditions we experienced for a number of years immediately after the crash favored an indexed approach. When all risk assets are highly
Most investors portfolios will benefit from a combination of active and passive management. Use
Robert C. Lawton is president of Lawton Retirement Plan Consultants, LLC (