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What Active Investing Should Really Mean For Your Portfolio

Zoe Team

Nov 22, 2021

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

Active investing is a rigorous, holistic framework, not just a short-term strategy to beat market benchmarks.
Use active management to create an objective approach that considers your entire financial life, not just individual stock picks.
Focus on a goal-oriented strategy that provides structure and clarity to your long-term portfolio performance.

Frequently Asked Questions

Is active investing just stock picking?

No, it is a comprehensive approach designed to provide a rigorous, objective, and holistic strategy for your portfolio’s growth.

How does active investing benefit me?

It allows for a more tailored, disciplined management style that adjusts to market conditions while staying aligned with your personal goals.

What is the goal of active investing?

It aims to deliver a systematic investment process that adds value by being objective rather than simply chasing short-term market wins.

Most investors consider “active” investing to be stock picking with the goal to outperform the broader market. However, an active investing framework can actually provide a rigorous, objective, and holistic approach to investing.

According to Gallup (2019), 61% of Americans invest in order to achieve their goals. Be it retirement, travel, starting a business, supporting others, or simply earning higher returns – the ultimate goal of investing is to make more money or preserve its value. Nevertheless, achieving that goal is where it gets a little tricky.

Active vs. Passive Investing

Active and passive investing are two distinct strategies, each with different goals and outcomes. It’s crucial to understand which approach aligns with your unique needs.

What Does Active Actually Mean?

Most investors consider “active” investing to be stock picking with the goal to outperform the broader market (i.e. S&P 500 Index). The investor (or the financial advisor on behalf of the investor)buys or sells individual stocksbased on specific factors, hoping to pick more winners than losers.

In contrast, “passive” investing employs a buy-and-hold strategy aimed at generating long-term market returnsby investing in benchmark indexes, accepting benchmark returns while reducing trading costs and improving tax efficiency.

Historically, there has been a lot of debate on the “active” vs. “passive” investing topic and whether there’s an actual value added to pursuing active investing.

The Evolution of Investing

Investment methods have evolved significantly over time. Before World War II, individual investors mostly owned individual stocks. In the 1950s, mutual funds gained traction, democratizing investing by lowering costs. The introduction of 401(k) plans in 1974 through the Employee Retirement Income Security Act (ERISA) marked a pivotal moment, further boosting mutual fund adoption during the bull markets of the 1980s and 1990s.

Exchange-Traded Funds (ETFs)were introduced in the 1990s, offering a more cost-effective and tax-efficient way to invest while trading like regular stocks. ETFs not only broadened access to domestic stocks but also provided exposure to international markets, commodities, and currencies that were previously hard for individual investors to access. According to a report from the Investment Company Institute, after the ‘08 Global Financial Crisis, ETFs gained further adoption and grew from $531B to approximately $5.45T from 2008 to 2020.

With the backdrop of commission-free stock trading, a new way of owning stocks has emerged:Direct Indexing.Direct Indexing allows for personalized and customized portfolios without having to “pool” different people’s money. In other words, it is the equivalent of building your own unique ETF.

This evolution has also transformed the role of financial advisors.

Understanding Wealth Creation Today

Anactive frameworkcan offer a rigorous, objective, and holistic approach to investing.

There are several investment frameworks that can help you achieve your financial goals. The key is to have a framework and the discipline to stick to it.

So how are advisors working with an “active” framework? Most of the action will happen behind the scenes. Here is an example of the activities an advisor would do:

Create a list of investable Asset Classes.
Develop a Strategic Asset Allocation using historical and forward-looking expectations of the asset classes.
Select appropriate Asset Allocation consistent with your preferences (risk, goals, time horizon).
Choose the investment styles (passive/hybrid/active) along with the investment vehicles (some of the widely used ones are below):
ETFs
Mutual Funds
Individual Stocks

6 Ways the “Active Framework” can Provide Value

Hint… it’s not about beating the market:

A goal-based approachleads to higher client engagement and a greater likelihood of sticking to the plan in fluctuating markets.
Selecting theright asset allocationcould have a huge impact on overall progress for your goals… According toresearch,
from Brinson, Hood, and Beebower (1986),90%+ of portfolio returns could be attributed to asset allocation.
The disciplined process ofchoosing/developing the investment strategyhelps maximize the risk-reward potential while minimizing the overall costs.
Regularportfolio rebalancinghelps minimize portfolio drift (the difference between the current and target portfolio) while keeping emotions out of the day-to-day portfolio management.
Advisors shouldkeep you motivated and accountablefor staying on track, especially during market swings.
In short, life is fluid and ever-changing… And your financial plan should be too!

The Bottom Line

Active investing is not a get-rich-quick scheme. Although most people may think of it as a stock-picking strategy that outperforms the market, we believe in using it as a framework rather than an investment management style.

Selecting the right asset allocation can have a huge impact on the progress of your financial goals, and this is one of the many ways an active framework can provide value to your investment strategy.

Building wealth while navigating through the challenges in life is a marathon and not a sprint. By establishing a consistent process to follow, you can work toward potentially achieving better outcomes over time.

Active vs. Passive Investing

Active and passive investing are two distinct strategies, each with different goals and outcomes. It’s crucial to understand which approach aligns with your unique needs.

What Does Active Actually Mean?

Historically, there has been a lot of debate on the “active” vs. “passive” investing topic and whether there’s an actual value added to pursuing active investing.

The Evolution of Investing

This evolution has also transformed the role of financial advisors.

Understanding Wealth Creation Today

Anactive frameworkcan offer a rigorous, objective, and holistic approach to investing.

There are several investment frameworks that can help you achieve your financial goals. The key is to have a framework and the discipline to stick to it.

So how are advisors working with an “active” framework? Most of the action will happen behind the scenes. Here is an example of the activities an advisor would do:

Create a list of investable Asset Classes.
Develop a Strategic Asset Allocation using historical and forward-looking expectations of the asset classes.
Select appropriate Asset Allocation consistent with your preferences (risk, goals, time horizon).
Choose the investment styles (passive/hybrid/active) along with the investment vehicles (some of the widely used ones are below):
ETFs
Mutual Funds
Individual Stocks

6 Ways the “Active Framework” can Provide Value

Hint… it’s not about beating the market:

A goal-based approachleads to higher client engagement and a greater likelihood of sticking to the plan in fluctuating markets.
Selecting theright asset allocationcould have a huge impact on overall progress for your goals… According toresearch,
from Brinson, Hood, and Beebower (1986),90%+ of portfolio returns could be attributed to asset allocation.
The disciplined process ofchoosing/developing the investment strategyhelps maximize the risk-reward potential while minimizing the overall costs.
Regularportfolio rebalancinghelps minimize portfolio drift (the difference between the current and target portfolio) while keeping emotions out of the day-to-day portfolio management.
Advisors shouldkeep you motivated and accountablefor staying on track, especially during market swings.
In short, life is fluid and ever-changing… And your financial plan should be too!

The Bottom Line

Disclosures: Zoe Financial, Inc. ("Zoe Financial") is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Zoe Financial provides investment advisory services and access to independent registered investment advisers through its platform. The information provided by Zoe Financial is for educational and informational purposes only and should not be construed as personalized investment advice or as an offer to buy or sell any security. All investments involve risk, including possible loss of principal. Past performance is not indicative of future results. Clients should consult with their own financial, tax, or legal professionals before making any investment decisions. The material presented by Zoe Financial is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Material presented has been gathered from sources believed to be reliable, however Adviser cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Past performance is no guarantee of future results. Zoe Financial does not provide legal or tax advice, and nothing contained in these materials should be taken as legal or tax advice. SEC Registration does not constitute an endorsement of Zoe Financial by the SEC nor does it indicate that Zoe Financial has attained a particular level of skill or ability. The sole purpose of this material is to inform, and it in no way is intended to be an offer or solicitation to purchase or sell any security, other investment or service, or to attract any funds or deposits. Investments mentioned may not be appropriate for all clients. Before making any investment, each investor should carefully consider the risks associated with the investment, as discussed in the applicable offering memorandum, and make a determination based upon their own particular circumstances, that the investment is consistent with their investment objectives and risk tolerance. Lower expenses do not guarantee better investment performance. Certain information contained herein may constitute forward-looking statements. Due to various risks and uncertainties, actual events, results or the performance of a fund may differ materially from those reflected or contemplated in such forward-looking statements.

Disclosure: This page is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional accounting, tax, legal or financial advisors. The observations of industry trends should not be read as recommendations for stocks or sectors.

Investment advisory services are provided by Zoe Financial, Inc. (Zoe Financial), an investment adviser registered with the U.S. Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training. Learn more about Zoe Financial on the SEC’s Investment Adviser Public Disclosure website. Brokerage services are provided by Zoe Securities LLC and Apex Clearing Corporation, members of the Financial Industry Regulatory Authority Inc. (FINRA) and Securities Investor Protection Corporation (SIPC). Learn more about Zoe Securities and Apex on FINRA’s BrokerCheck website.

The information in the visuals above is for illustrative purposes only and does not represent an actual user's account, balance, or return. Zoe Financial does not provide tax or legal advice.

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