Active or passive? How investing in both could drive portfolio returns

We examine the potential benefits of blending active, passive and factor-based investment vehicles

Duy NguyenWhen most investors think of diversification, they think about including stocks and bonds in their portfolio, or US and international investments. Fewer investors think about diversifying among investment vehicles — such as active mutual funds, factor-based exchange-traded funds or passive benchmark strategies. But we believe vehicle diversification is a topic that deserves more attention — our research shows that combining different types of strategies can impact a portfolio’s risk and return characteristics, which may meaningfully affect an investor’s long-term investment experience.

Active and passive outperformance moves in cycles

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From A to Z: Decoding common financial terms

Skip the alphabet soup and discover the real meaning of these investment terms

Jack Tierney

A former colleague of mine from New York City had a beautiful, multi-syllabic, Italian last name that began with “A” and ended with the “Z” sound. Since it was hard to pronounce for a lot of people, he simply told everyone to call him “A to Z.” This tactic worked, because everyone remembered him and didn’t have to worry about mispronouncing his name.

I remembered him when I was drafting this blog, thinking about all the terms and jargon that our industry uses in describing investments and investment strategies. We literally have terminology from A to Z, and while all of it is useful for the right audience, so much of it can be terribly confusing without the proper context.

So are there terms we can lose — or at least define more clearly? I believe so. Below, I’ve dipped into this alphabet soup to highlight terms that can cause confusion and offer up simpler suggestions to help get the point across.

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Are there ‘good months’ and ‘bad months’ to invest?

The truth behind ‘sell in May and go away’ and the ‘October effect’

Fielder_Tracy_sm_150dpi_RGBThere are seasons I look forward to during the year — the warm months for fishing and the cold months for hunting — and some I’d just as soon avoid — like hurricane season and allergy season. One of the questions I often hear from investors is whether there’s an ideal “investing season” that they should plan for each year. Is there any truth to the adage to “sell in May and go away,” and is the “October effect” really something to fear?

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Video: Confused about your returns? How to go from IDK to IRR

Understanding your portfolio returns: Part 3

Fielder_Tracy_sm_150dpi_RGBThere are several different ways to measure portfolio returns. But only one takes into full account the complexity of the investor experience — the internal rate of return. This video explains what the internal rate of return is, as well as the advantages and disadvantages of judging a portfolio based on this measurement.

•  The internal rate of return considers an investor’s account balance at the beginning and end of the period, as well as any contributions, withdrawals, growth or declines in the value of the account’s assets during that time.

•  On the plus side, the internal rate is the calculation that’s most relevant to an investor’s personal investment experience.

•  On the other hand, calculating the internal rate of return requires specialized software or a financial calculator. However, financial advisors can supply this for their clients.

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Video: What can you learn from average annual returns?

Understanding your portfolio returns: Part 2

Fielder_Tracy_sm_150dpi_RGBThere are several different ways to measure portfolio returns, and it’s important for investors to understand the significance of what they represent. This video explains what average annual returns are, as well as the advantages and disadvantages of judging a portfolio based on average annual returns.

•  Average annual returns represent the effect of gains and losses on an investment.

•  Importantly, this type of return measurement is a helpful guide for measuring long-term performance, and it allows investors to easily compare different investments.

•  However, average annual returns can have a “smoothing” effect on long term results. In other words, an average can hide underlying volatility.

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Video: What do cumulative returns really tell you?

Understanding your portfolio returns: Part 1

Fielder_Tracy_sm_150dpi_RGBThere are several different ways that investors can measure their portfolio returns. This video explains what cumulative returns are, as well as the advantages and disadvantages of judging a portfolio based on cumulative returns.

•  Cumulative returns show the total percentage change in the value of an investment from the time it was purchased.

•  On the plus side, cumulative returns provide investors with the bottom line — they show how an investment has performed since Day 1.

•  On the minus side, if investors look only at the cumulative return, it’s difficult to compare performance across multiple investments purchased on different dates and for different prices.

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