Active Management refers to a strategy where a portfolio manager actively makes investment decisions with the aim of outperforming a specific benchmark or achieving a particular investment objective. This approach contrasts with passive management, where the strategy typically involves mirroring a market index or following a set investment rule without frequent changes.
Key characteristics of active management in IRAs include:
- Stock Picking: The manager actively selects stocks (or other securities) they believe will perform better than others in the market.
- Market Timing: Decisions are made on when to buy or sell assets based on predictions about market movements and trends.
- Research-Driven: Active managers typically rely heavily on market research, economic forecasts, and company analysis to make their investment decisions.
- Goal of Exceeding Benchmarks: The primary objective is often to outperform a relevant market index or benchmark.
- Higher Fees: Active management usually involves higher fees than passive management due to the increased level of involvement and decision-making.
- Potential for Higher Returns (and Risks): While there’s the potential for higher returns compared to passive strategies, there’s also a higher risk and no guarantee of outperforming the market.
Active management in IRAs can be suitable for investors who prefer a more hands-on approach and are comfortable with the higher fees and risks associated with attempting to outperform the market.