Active v Passive Investment Management - My Ghetto Blaster Story

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When I was 12 I had a paper route. I loved my paper route primarily because my parents had a very simple rule. You earn the money, you spend the money on whatever you like. After my first year of delivering the newspaper (the fastest way to obtain news at the time), I found myself with enough savings to pursue my first purchase. My very own Ghetto Blaster! I was faced with a choice that I remember well to this day.

 

There were three models of the ridiculously large stereo I was considering to buy. They all looked very similar and went from cheap and low quality, to slightly more expensive and high quality. As I didn’t want to wait, and could not see the difference in quality from the look of each of the machines, I chose the instant gratification and inexpensive route despite the salesperson trying convince me otherwise. I could not have been happier as I lugged my massive boom box home with me to try it out for the first time.

 

As soon as I pressed play on the cassette player, I knew I had made the wrong decision as it popped off onto the floor. From there it was years of repairing and replacing. Things were just not working exactly as they should have. Every time I looked at my purchase, I was reminded that in many cases, CHEAPER IS NOT ALWAYS BETTER.

 

Fast forward 30 years and I find myself in the middle of a similar debate when developing investment portfolio’s. Passive versus Active investment management pits the low fee, hands off approach (Passive), against the higher fee, hands on approach (Active). Index funds and Exchange Traded Funds (ETF’s) are the most common investment vehicles within the Passive space.  

 

I find that the media attention in this area misleads investors into thinking one method is superior to the other. I can understand this, as it allows for a more confrontational story and thus satisfies their number one agenda of attracting more eyeballs. However, I think 100% one route or the other is simplifying the analysis far too much.

 

Our solution, WHY DO WE HAVE TO CHOOSE ONE OR THE OTHER? Our extensive research on this topic shows that the best of class investments in both categories add tremendous value when combined together in the proper way. Pay a bit more for active managers that are structured in a way that they may reduce risk or increase returns. Pay less for pure market exposure in a diversified but less targeted approach. For those who are interested:

 

Click here for more information on Active management

 

Click here for more information on Passive management

 

One of the most valuable service we provide to our clients is the ability to constantly review the different financial investment options available to Canadian investors. The investment landscape is confusing and evolving daily. Part of our job is to review and evaluate the different options on behalf of our clients. This involves analysis of fees, objectives and performance. A recent article in the Globe and Mail by Rob Carrick blasted advisors for not caring about reducing fees. He stated “The human touch in the investment business means giving a darn about how much your clients pay”. WE CARE! Our goal is to continue to lower the cost of your investments while increasing the quality of investment management. To do this we must continue to be open to, and diligent in, pursuing ideas that make things better while not getting caught up in the flavor of the day.

 

If you have any questions or would like to learn more about our research on this topic, please give us a call.