The debate about which is better - passive versus active investing - has been around for a long time. But in a world of pooled investment vehicles, especially with such a breadth of mutual funds and exchange-traded funds (ETFs), there are technically two levels on which decisions must be made: within the funds, and amongst the funds. Consequently, to describe the approach of an investment advisor, we should ultimately describe the process at both levels, to make clearer distinctions. For instance, are you strategically passive, or would strategically active be a better description. Wait, strategically active? What does THAT mean!?
With the financial crisis of 2008-2009, some planners appear to be considering - if not adopting - a somewhat more active approach. Unfortunately, though, for many planners any investment strategy that is not purely passive and strategic must be equated to "market timing" - a pejorative term. Yet the planners who have implemented some form of tactical asset allocation generally do not call themselves market timers; they recoil at the term as much as passive, strategic investors do. So where do you draw the line... what IS the difference between being "tactical" and being a "market timer"? In truth, it seems that once you dig under the hood, the differences are nuanced, but they are many, and significant.
Once again the charge of being a “market timer” is being hurled at active portfolio managers in a recent discussion thread initiated by Bob Veres on Financial-Planning.com. The term itself seems to get planners into such a tizzy, though, while the actual definition of what constitutes “market timing” is unclear at best; perhaps a new definition of market timing is in order. To say the least, the most common definition of market timing, the one that implies that market timers are similar to “retail” day-traders willing to take their portfolios to extreme asset allocations based on their very short-term predictions of future market behavior, is badly in need of an upgrade.
In a world where retirement planning is increasingly about not only the accumulation phase towards retirement, but the distribution phase in retirement, financial planners must deal with the practical realities of generating retirement cash flows for clients. And although most of us may have some policies in our practices about how we generate cash flows for clients, do any of us actually have a written withdrawal policy statement in place to determine the appropriate tactics and strategies for each particular client?
For much of the past decade or two, one of the most important qualifications for a "good" mutual fund manager was that he/she keep the fund squarely within the constraints of its Morningstar style box, while hopefully generating some positive alpha. Now, however, an emerging group of managers are overtly bucking the trend, with a new approach of "free range" investing.
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