The stock market is a complex world where each decision can significantly influence the performance of an investment portfolio. There are two main philosophies of stock market management: active management and the passive management.
Active management: the objective of outperforming the market
In the active management, the portfolio manager plays a central role. His mission ? Beat the market.
Financial markets show historical returns of plus or minus 8% per year. To simplify things, outperforming the market means obtaining a return greater than 8% per year.
To succeed in beating the market, the market manager carefully selects the actions, obligations and other financial assets that it considers undervalued or promising.
Using fundamental and technical analyses, the objective is clear: to obtain a return on investment superior to that of benchmark indices.
The manager must constantly monitor the markets to adjust his allocations according to changing economic conditions. Common examples include rapid decisions in the face of major events or seasonal adjustments in various industry sectors.
This solution should allow greater gains but it involves taking more risk. If you don’t know much about adopting this practice, copytrading offered by certain platforms can be a solution.
Towards a passive management approach
On the contrary, the passive management focuses on replicating the performance of a stock market index. It’s the same principle as SCPIs and real estate.
The idea is to construct a portfolio that faithfully tracks a specific index like the S&P 500. In doing so, management costs are significantly reduced because there are fewer transactions made and therefore fewer brokerage or advisory fees to pay.
This method generally allows for instant diversification because it exposes the investor to a wide range of securities present in the copied index.
THE ETFs (exchange traded funds) are popular tools used for passive management thanks to their simplicity and effectiveness. You still need to know how to choose your ETFs.
Active management vs. passive management
When done well, active management can generate returns significantly above those of the market. A good manager with keen analytical skills can identify opportunities that automatic models and indices do not necessarily capture.
In times of volatility, active management also provides the flexibility to protect capital by quickly adjusting positions.
For example, in the event of a financial crisis, an active manager could reduce exposure to the most affected sectors and increase exposure to traditional safe-haven assets like bonds or gold.
| Potential superiority | Higher returns with good management |
| Analytical skills | Identifying unique opportunities |
| Flexibility in volatility | Rapid adjustments to protect capital |
| Crisis strategy | Reallocation to safe haven assets |
| Skill dependence | Variable results depending on the manager |
| High costs | Frequent transactions and in-depth searches |
| Sustainability Challenge | Difficulty maintaining long-term outperformance |
| Risk of underperformance | Frequent underperformance relative to indices |
But active management is not without its flaws. Its success relies heavily on the competence of the manager, making the results sometimes very variable. For this reason, passive management is perfect for investing in the stock market without a specific diploma.
What’s more, this approach involves higher costs due to the frequent transactions and extensive research required.
Market outperformance remains difficult to sustain over the long term, and many active funds end up underperforming relative to their benchmark after taking into account the total costs incurred.
Choose between active management And passive management in the stock market is based in particular on the personal objectives of the investor, his time horizon, his tolerance for risk and his interest (or lack of) in the daily monitoring of the financial markets.
While some favor the human expertise offered by active management, others favor the tranquility and cost-benefit efficiency of passive management.
