Does Your Portfolio Have Room for Both Active and Passive Investing?

Thursday, 29 March 2018 08:07

Does Your Portfolio Have Room for Both Active and Passive Investing?

Investors today live in an era offering unpCapitalizing on a Growing Global Economy

One of the notable trends in 2017 is that for the first time since the Great Recession, virtually all economies around the world have enjoyed synchronized global growth. This is one of several reasons why investors have increasingly turned to international stocks and bonds to diversify their portfolio over the long term. If you are wondering if overseas markets should be part – or an increased part – of your diversified portfolio, here are four considerations to keep in mind.

1.Non-U.S. markets make up a growing portion of the world’s economy

The U.S. is still the largest economy in the world, representing about one-quarter of total global Gross Domestic Product (GDP) according to the International Monetary Fund. Yet emerging markets, including countries with much larger populations such as China and India, represent more than 50 percent of global GDP. This may represent significant investment potential.

2.Growing economies lead to an emerging middle class

For the past generation, an important economic story is the ascendance of the emerging global middle class. The improved economic prospects for millions of people across the globe continues to generate a new wave of consumers and business growth. Additionally, established companies in the U.S. and overseas are capitalizing on the burgeoning numbers of consumers and businesses. This rapid growth may create the potential for attractive investment opportunities in other markets.

3.Overall stock value is still skewed to the U.S.

U.S. stocks still draw more attention than any other part of the market. For example, their value makes up more than half of the total value of the Morgan Stanley Capital World Index of 23 developed markets. However, the influence of emerging markets is growing. As non-U.S. economies continue to become more prominent on the world stage, more investment dollars may flow into their equity and fixed income markets.

4.Global investments can help diversify your portfolio

A risk of having all your money invested in U.S. stocks and bonds is that when markets move in a negative direction, your portfolio will be significantly exposed to the potential for losses. For example, if interest rates in the U.S. begin to trend higher, it could create a challenging environment for domestic bonds. However, that doesn’t mean the same trend will be happening in all overseas markets. There may be attractive opportunities in bonds issued by foreign governments or corporations. The same is true of equity markets. As markets move up and down, there could be times when the U.S. market may perform better than overseas markets, and vice versa.

Is investing overseas right for you?

If you haven’t sufficiently incorporated global investments into your own portfolio, this may be the time to explore it further. There are risks to consider, such as currency fluctuations, that can impact the net return you receive on investments in overseas securities. Purchasing individual securities may be more challenging on a global level than it is when you focus on U.S. investments. For that reason, a good alternative for many investors may be to utilize mutual funds or exchange-traded funds that invest in broad global markets or specific segments of them.

Global stocks and bonds offer the potential to effectively diversify your portfolio over the long run. Talk to your financial advisor to determine whether you might be able to capitalize on this expanding piece of the investment marketplace.

Jeremy Taylor is a Financial Advisor with Taylor, Taylor & Associates a financial advisory practice of Ameriprise Financial Services, Inc. in Menifee, CA. He specializes in fee-based financial planning and asset management strategies and has been in practice for 13 years - To contact him, please call 951-679-2222, 29826 Haun Rd #206, Menifee, CA 92586. http://www.ameripriseadvisors.com/jeremy.i.taylor/profile/

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Investment products are not federally or FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution, and involve investment risks including possible loss of principal and fluctuation in value.

Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.

Ameriprise Financial Services, Inc. Member FINRA and SIPC.

recedented global investment choices, in both active and passive vehicles. Investments in each category have opportunities and challenges for investors to consider when crafting an optimal financial strategy. With so many choices at your fingertips, how can you best capitalize on what the markets have to offer? There is no right answer for everyone, but in many cases, it may make sense to use both active and passive investments to effectively build and manage a diversified portfolio.

Defining active and passive investing

Active investing is an approach that seeks to capitalize on inefficiencies in the market by identifying individual securities that don’t currently appear to be priced based on their true underlying value. Success using this approach generally requires in-depth research and analysis by knowledgeable investment professionals. Many traditional mutual funds fall into this category. Active fund managers who oversee these funds seek to generate returns that outperform a benchmark, or a specific measure of market performance, such as the S&P 500 index. They make investment decisions based on a defined approach or strategy.

Passive investing is an approach that seeks to match the performance or a specific benchmark or segment of the market. Many passive investors choose, for example, to put their money to work in an index fund that invests in a broad segment of the market. Perhaps the most common passive investments are funds that track the performance of the S&P 500 Index, an unmanaged index of large capitalization U.S. stocks. The premise is to own a broad cross-section of the market, or of a segment of the market, rather than trying to identify specific securities that may outperform a benchmark or segment of the market.

It’s worth noting that there are increasingly more investment options offering a middle ground between active and passive strategies. Called strategic or smart beta, this investment strategy combines the transparency, consistency, and cost-efficiency of passive investing, with the investment insights found in active management.

Considerations for each approach

There are benefits and shortcomings to each approach. Actively managed investment strategies offer the opportunity for outperformance versus a specific segment of the market. They can also take steps to defend against the impact of down markets that inevitably occur from time-to-time, often by avoiding individual securities or sectors that have challenges. To accommodate the research and expertise involved, actively managed investments typically come with higher expenses, which detract from the net returns they generate. Also, because they are using a selective approach to investing, there are times when they will choose to invest in securities that don’t perform to expectations, and perhaps miss out on the full benefit of broader upward trends in the market.

A key benefit of passive investing is that fees tend to be lower than other investment strategies. They also tend to be tax efficient because trading is minimized in the fund as it continues to track an index over the long term. A downside to passive funds is that by simply investing in a benchmark, an investor foregoes the opportunity to outperform that index. This means returns tend to match those of the market, minus any fees. Also, in volatile periods or when markets trend down, index fund investors will see their investments follow a similar path.

A case for both strategies

Is one approach the best choice for your portfolio? The reality for many investors is that a combined approach may be an effective solution. Investors should pay close attention to factors that can affect their investment results, including fees, different sources of potential investment return and the benefits of a diversified portfolio.

You may determine that part of your portfolio should generally track with the market. If that’s the case, a passive fund may make sense. At the same time, you may want to take advantage of specific opportunities in segments of the market where selectivity may help you reach your goals. If so, active strategies may offer a better path to success.

The good news is that you have a tremendous opportunity to effectively diversify and tailor your portfolio to help you achieve your long-term goals. A financial advisor can work with you to determine what approach and investments work best given your financial goals, investment time horizon and risk profile.

Ameriprise Financial, Inc. and its affiliates do not offer tax or legal advice. Consumers should consult with their tax advisor or attorney regarding their specific situation.

Investment advisory products and services are made available through Ameriprise Financial Services, Inc., a registered investment adviser.

Ameriprise Financial Services, Inc. Member FINRA and SIPC.