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Plan Well, Retire Well

Saving and investing your money

Investment Strategies: Where Do You Fit?


Most investors are well aware of the two general approaches used by mutual funds: active management and passive management, as seen in mutual funds that track an index. But I recently gained some insight about how these two fund strategies are only half the story, and I'd like to pass that along to you.

I attended a conference of the National Association of Personal Financial Advisers last month and heard a presentation by Richard Ferri, author of The Power of Passive Investing and other books. Ferri is a strong proponent of using passively managed index funds and ETFs. His presentation focused on the extensive history of research supporting his position.

But the "ah-ha" that I got from his presentation was his description of the four ways to manage an investment portfolio, looking at both the fund's investment strategy and how you (or your financial advisor) allocate your money to the funds you choose.

I've heard the terms "strategic asset allocation" and "tactical asset allocation" many, many times. But Ferri's explanation finally helped me get the distinction.


Strategic allocation is a passive approach: you decide what the asset allocation will be, and you rebalance periodically to maintain that allocation.

Tactical asset allocation is active: you are shifting from one asset class to another, or at least shifting the proportion of your portfolio allocated to an asset class.

Combine strategic allocation or tactical allocation with actively or passively managed mutual funds, and you get four ways to manage your money:

  • Passively managed mutual funds, active allocation: You invest in index funds, but you move in or out of those funds and change your asset allocation based on economic news or your own instincts.
  • Actively managed mutual funds, active allocation: You choose mutual funds based on performance or the reputation of the fund manager, and you make decisions to move in or out of those funds and change your asset allocation.
  • Actively managed mutual funds, passive allocation: You choose mutual funds you hope will outperform the market, but you choose and maintain an asset allocation by periodic rebalancing.
  • Passively managed mutual funds, passive allocation: You choose index funds, and you only shift assets to maintain your chosen asset allocation.

Where do you fit? Do you consider yourself a passive investor, but in reality you shift into and out of asset classes based on your personal assessment of the economy? Or perhaps you carefully choose among actively managed mutual funds, but once there, you maintain those investments except to rebalance.

Have a little heart-to-heart with your inner investor. You might be in for a surprise, and find out that you're not the investor you thought you were!



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COMMENTS



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Informative and to the point. I wonder where I fit... Time to do some sleuthing!!
by B H on Thursday 8/25/2011

I consider myself a savvy seasoned investor. but a place i found helpful and has a lot of smart people. to learn from would be a site like http://investmentssocial.com/ its like fb , but for smart people who take there Investment Strategies serious.
by Meloney Johnson on Tuesday 10/18/2011