Investing 101

Active management for retirement savings

Active management in retirement savings means having professional managers make investment decisions to try and generate better returns while managing risks. This approach can lead to higher growth and flexibility, but it also comes with higher costs and no guarantees of beating the market. Active managers use research and analysis to navigate market conditions and adjust portfolios as needed.

Key takeaways

  • 01

    Understand how active differentiates from index investing

    Compared to index investing, active strategies involve an investment manager aiming to earn higher returns relative to the fund's benchmark. They seek higher returns by making informed decisions about your investments and how much of your savings is allocated to certain opportunities. They can also reduce risk and navigate market volatility.

  • 02

    Know the potential benefits of active management

    Active management can potentially lead to higher returns by making informed investment decisions based on research and analysis. It can also help mitigate risks by shifting investments and adjusting portfolios to meet goals across different market conditions.

  • 03

    Consider all the qualities of active management

    The extra work required may result in higher fees but may be offset by additional growth. It is also not an exact science, so outperformance isn’t guaranteed, and finding skilled active management requires due diligence.

What is active management?

When it comes to investing your retirement savings, there are different strategies to consider. One option is active investing, which leverages the expertise of skilled managers to make decisions about how and where to invest your savings to help achieve certain goals.

Compared to index investing, active strategies involve an investment manager that aims to earn you higher returns in relation the index associated with a fund, also known as the benchmark. They seek these higher returns by making informed decisions about what you’re invested in and how much of your savings is allocated to certain opportunities. Active managers can also possibly reduce risk and help your portfolio navigate volatility in the event of market downturns.

The decisions made by active managers are based on research and analysis to identify opportunities and risks for your portfolio. They could determine that certain industries are likely to experience higher growth and allocate more of your portfolio to that area. Similarly, they may move your investments away from a different investment area that they decide is overvalued.

Potential benefits of active management

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Higher growth potential
Your investments may outperform the market, earning you higher returns that can help you catch up to your savings goals or more comfortably retire.
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Flexibility
Active managers can move your savings to investments that can help meet your goals across a range of market conditions.
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Risk management
As part of the strategy, managers can shift away from areas that they believe might be exposed to higher levels of risk to protect your savings in market downturns.

Potential considerations with active management

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Higher costs
The extra work required to research, analyze, and more frequently trade may result in higher fees. These higher costs may be offset by additional growth.
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No guarantees
It is informed by decades of experience but not an exact science. There are no guarantees that your manager will outperform the market and might even underperform.
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Unskilled managers
Good active management can be hard to find and requires due diligence to ensure you have skilled and reputable oversight over your investments.

How active management can help manage risk

The benefit of active investing strategies isn’t limited to just higher returns. It’s likely that the market will experience both ups and downs over the course of your retirement savings journey. Active managers can do their part to help limit losses during downturns. They can do this by being nimble and using diversification and other tools to not only seek higher performance but also mitigate risk.

With index investing, your savings will stay invested in a consistent manner according to what the fund is aligned with. But when actively managed, you’ll have a decision maker that can potentially anticipate and respond to market events. By utilizing hedging, active managers can make investments that could generate returns to offset losses in other areas.

Wrap up

Frequently asked questions

  • Compared to index investing (which is considered passive), active strategies involve an investment manager that aims to earn you higher returns in relation the index associated with a fund, also known as the benchmark. They seek these higher returns by making informed decisions about what you’re invested in and how much of your savings is allocated to certain opportunities.

     

  • Active management is informed by decades of experience, but it’s not an exact science. There are no guarantees that your manager will outperform the market and might even underperform.

     

  • The extra work required to research, analyze, and more frequently trade may result in higher fees. These higher costs may be offset by additional growth.

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