What Is Active Portfolio Strategy
It’s an investment strategy where investors aim to achieve a higher return than the benchmark by managing a portfolio of assets. The strategy involves analyzing market trends and factors that impact the asset price, and based on the analysis, investors frequently buy and sell securities.
Using an active portfolio strategy, an investor seeks to outperform a buy-and-hold portfolio by effectively utilizing available information and forecasting tools.
More Thorough Understanding of the Term Active Portfolio Strategy
The term “active” refers to the fact that the portfolio manager makes informed decisions to buy and sell securities to achieve investment objectives.
Since the portfolio manager is making bets on future performance, active portfolio management usually involves a more significant risk than the passive strategy. On the other hand, the reward can be significantly better if the manager makes informed investment decisions based on analysis and market research.
Simply put, active portfolio management is different from passive portfolio management. Passive portfolio management involves buying and holding a diversified portfolio of securities without managing them actively.
Types of Active Portfolio Strategy
The primary purpose of active portfolio management is to exceed the market average or a specified benchmark, such as the S&P 500 index. There are various types of active portfolio management available.
- Value Investing
It is an active portfolio management method that entails discovering undervalued firms and investing in them, hoping their value will rise over time.
- Growth Investing
Growth investing is an Active Portfolio Strategy that entails investing in firms with strong potential for growth. Growth investors seek companies with high earnings growth or sales growth prospects.
- Momentum Investing
This method involves implementing a strategy where an investor invests in a security or assets that recently performed well and are expected to be performing well.
- Quantitative Investing
Quantitative investing identifies investment opportunities using mathematical models and algorithms.
Warren Buffett is primarily considered as one of history's greatest successful investors. Berkshire Hathaway, his investment firm, employs an Active Portfolio Approach that focuses on value investing. Buffett seeks out firms with solid fundamentals and long-term growth potential that are undervalued. He also seeks companies with a competitive advantage, such as a strong brand or distinctive intellectual property.
Fidelity Contrafund is an Active Portfolio Strategy mutual fund. Will Danoff, the fund's manager, seeks companies with substantial earnings growth potential and competitive advantage. He also seeks for companies that the market has undervalued.
- The active portfolio method involves more risk than passive management, but the potential payoff is also more significant.
- Before making any investment decisions, investors should carefully analyze the risks and potential rewards of Active Portfolio Strategies.