Active Management

  

Active management is usually used with investment companies offering mutual funds and similar types of investments. They hire groups of Type-A money people in fancy suits. These portfolio managers and analysts drink a lot of coffee, read a lot of money-related reports and forecasts, and look at a lot of charts to try to figure out how to pick stocks and investments that outperform their return targets.

Passive management, BTW, is the opposite. Usually it's a thing with ETFs and index funds, where a bunch of stocks are picked because they are all linked to a specific area (like tech, for example). Nobody spends time trying to figure out what to buy. Instead, the investments are sometimes rebalanced to make sure they still match up what they're supposed to represent. One money guy with a computer can usually handle investments in a passive management style.

Related or Semi-related Video

Finance: What are Active Investing and A...4 Views

00:00

Finance a la shmoop.. what are active investing and active management? Active

00:09

doing something, active as in trying to beat the market by trading stocks active [People riding a bike on stock market appears on board]

00:15

as in humans making decisions often with the help of computers trying to beat

00:20

their index or the overall market ie the S&P 500 that's what we mean by the

00:24

market active; investing.. active; management okay

00:29

passive just passive.. active is what hedge funds and mutual funds and any

00:35

kind of funds that have a strategy do they actively try to invest money such

00:40

that the performance of their portfolio does better than whatever index or

00:45

benchmark it's measured against and notice were not talking about after-tax [Man discussing active investments]

00:50

performance here because remember every time you trade in a taxable account

00:54

while the attacks men cometh but we won't go there right now..... Your benchmark

01:01

compare is versus the S&P 500 and you manage a broadly based mutual fund the

01:07

passive investing cousin in this investment is an index fund think ticker

01:13

SPY, that's the biggest S&P 500 index fund well index funds are not actively

01:18

managed they are passively managed they just sit there and get tweaked a little [Pile of money grows larger overnight]

01:23

bit each year or really each quarter to kind of mirror the S&P 500 or whatever

01:28

their index is supposed to mirror but they just kind of sit there there's no

01:31

human trying to beat the market they are the market index funds are the

01:35

market and yeah 99% of actively managed funds don't beat the market over any

01:42

extended period of year like five or ten years very few ever beat the market and

01:47

essentially none of them beat the market after taxes so then why would someone

01:51

invest in an actively managed mutual fund when they're paying taxes and

01:56

they're thinking about an index fund as a comparable well basically they're one [Mutual funds on a table and a lollipop appears]

02:00

of these so yeah don't be one of these guys

Up Next

Finance: What is Closet Indexing?
0 Views

What is Closet Indexing? In the mutual fund arena, funds are usually active, meaning there is a highly paid fund manager calling the shots, or pass...

Finance: What is the Barrons Confidence Index?
14 Views

What is the Barron’s Confidence Index? The Barron’s Confidence Index compares the yields of the highest graded bonds to intermediate graded bon...

Finance: What is a Country Basket (Index Fund)?
30 Views

What is a Country Basket (Index Fund)? Investing internationally can be a challenge, as foreign exchange, different accounting rules, time zones an...

Finance: What is the Russell Index?
4 Views

The Russell Index is a series of indices that tracks the progress of stocks in a given basket. Aw. We were hoping it tracked adorable Jack Russell...

Find other enlightening terms in Shmoop Finance Genius Bar(f)