Making the implicit explicit: A framework for the active-passive decision

January 30, 2018

 

The decision to use active, passive, or a combination of both investment types in a portfolio is too often framed as an either-or debate. Advisors can sometimes base decisions on implicit assumptions or expectations rather than taking a measurable approach. The absence of a quantifiable decision-making process can lead to less-than-optimal outcomes and could leave clients with portfolios that do not match their risk tolerance.

Appropriate active-passive asset allocation should not be a debate, a binary choice, or a one-size-fits-all decision. Although indexing can be a valuable starting point and advisors may index entire client portfolios, Vanguard research shows that for those comfortable with the characteristics of active investing, an allocation to active may also be viable.

Our new active-passive decision-making framework helps investors focus on the factors that matter most.

Use this research to:

  • Consider gross alpha expectation, cost, active risk, and active risk tolerance when allocating client portfolios.
  • Provide clients with a structured decision-making process.

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Note:

  • All investing is subject to risk, including possible loss of principal.

 

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