Fixed income securities, or bonds, have a place in many investment portfolios. But under current market conditions, a traditional "buy and hold" strategy may not offer the security or returns you seek. Instead, consider active portfolio management.
Active Versus Passive
Buy-and-hold management, also known as passive management or index investing, simply holds bonds, often seeking to merely match the risk and return profile of a selected index. It does not attempt to mitigate risk or achieve additional returns through active trading or other strategies.
Active portfolio management, on the other hand, aims to outperform specific benchmarks. To do this, a skilled team picks individual bonds based on models, insights and analytical research.
Returns and Risk Management
Besides striving to "beat the market," an active management approach may help mitigate income and interest rate risk by investing in fixed income sectors less correlated with interest rates.
In addition, active management has the potential to provide protection in down markets. Active managers attempt to predict market downturns, and then defensively position a portfolio to perform better than an index in that down market. Such downside protection may also compensate for any underperformance in rising markets.
First and foremost, active management requires a skilled management team. In addition, actively managed funds may have higher fees, since they involve greater overhead in terms of staffing, and time for research and analysis. Frequent buying and selling may result in more capital gains and thus increased tax costs to the client.
Neither passive nor active management can completely shelter you from the possibility of below-market returns, and it's best to discuss your specific situation with your financial advisor. In general, though, we believe the unique characteristics of fixed income securities and investing continue to lend strong support to the active management case.
To learn more about the active management team in our Wealth Management Division, to discuss your fixed income options, or for an overall assessment of your goals and objectives across the entire asset allocation spectrum, please contact your local Wealth Advisor.
The information contained in this article is intended for general educational purposes only and is not to be construed as legal, tax, or financial advice. Please consult with your own legal, tax or financial advisor for guidance with your own particular circumstances.