The Investor’s Dilemma: Active, Passive, or Asset-Class Investing?
It’s a decision that warrants the investor’s time and due diligence, because, ultimately, your wealth is at stake and the wrong move could be costly.

When it comes to your wealth management strategy, deciding what to do gets complicated. There are about 45,000 individual securities and more than 30,000 mutual funds and 1,000 ETFs (exchange-traded funds which track a particular index).
There is a map to help guide you through the tens of thousands of investments to choose form. First, you must decide between Active Management and Passive Management. Active Management is someone or a team making decisions based upon their research, then engaging in the market as a competitor in search of Alpha (excess return above a specific benchmark). Passive Management on the other hand seeks to capture the return of the market without taking excess risk, and most importantly at a lower cost to investors.
Active managers are prone to emotion, external circumstances, and management style drift. They try and outsmart the market based on analysis, timing, predictions and forecasts. Over time it has been shown that a significant majority of actively managed funds will underperform their respective benchmarks. There are multiple reasons for this discrepancy, starting with higher fees and less tax efficiency.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.

Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar. It’s simple math: After fees and costs, active management becomes a losing game in which the expected outcome is negative. Said differently, some active managers will win some of the time, but the majority usually come up short. It’s a zero-sum game, so with every winner there’s a loser. Trying to pre-identify the small percentage of the winners is extremely difficult.
Passive investing, while less sexy, has become increasingly popular for a large number of investors. A recent study showed that in one year $61 billion flowed into the passive management fund bucket, and in the same year $95 billion flowed out of the active management fund bucket; this trend continues.
Here we come to a fork in the road: Indexing via ETFs or index funds, or Asset-Class Investing.
There are some inherent problems with ETF or index-fund investing:
- There are costs associated with tracking an index. When indexes drop or add a security, the tracking funds are required to do the same. This pushes the price up for purchases and down for sales, making the transaction more costly. The index fund loses the information game here as market participants can anticipate trades ahead of time.
- Indexes are not flexible, and there’s often drift between asset classes. Constituents of any index can move from one asset class to another (small cap to mid cap, for example), but the index only reconstitutes once a year.
- There is zero flexibility in security selection. The Index fund needs to mirror its respective index. There are no exceptions.
Indexes are designed to establish market performance and serve as a benchmark for active managers, not serve as investment vehicles. Some of the advantages of ETFs or index funds are that they have low costs, broad diversification and tax advantages.
Asset-Class Investing is a form of passive investing in the sense that the underlying premise is that markets are efficient, and increasingly so. Both Asset-Class and Passive Management are based on the hypothesis that markets are efficient in that they rapidly price information from 45+ million trades a day, which makes it very difficult to capitalize on any public information.
But there is one major difference: Asset-Class Investing is based on research from some of the academic community’s most innovative and respected thinkers and economists. Rooted in the knowledge that asset allocation has the greatest impact on investment returns, it is designed to control the investments included in each asset class.
This increased flexibility and ability to keep asset classes pure to their objective allows asset-class funds to truly capture the returns in each respective asset class in a dynamic, tax-efficient and low-cost manner.
Some of the advantages of the Asset-Class Investing approach include:
- More flexibility than Passive Management in allowing more pure exposure to the various asset classes. When there is style drift or a significant change in a security’s profile (from small cap to mid cap, for example), changes can be made to the portfolio on a daily basis. Given the annual reconstitution basis of index funds, there can be significant divergence from the asset allocation model. Asset-Based Investing can adjust on a daily basis.
- Securities within asset-class funds can be adjusted with discretion as opposed to the rigid structure of Index funds.
- Advanced trading strategies can be deployed to minimize transaction costs.
Ultimately, the decision on which investment approach to take must come from you (and your financial adviser, if you’re working with one). It’s a decision that warrants the investor’s time and due diligence because, ultimately, your wealth is at stake and the wrong move could be costly.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Woodring is founding partner of San Francisco Bay area Cypress Partners, a fee-only wealth consulting practice that provides personalized, comprehensive services that help retirees and busy professionals to enjoy life free of financial concern.
-
Rally Fades on Mixed AI Revolution News: Stock Market Today
All three main U.S. equity indexes opened higher but closed lower as a seven-session winning streak for the S&P 500 came to an end.
-
Stretch Your Holiday Shopping Budget Further with These Under-$50 Gifts That Don't Feel Cheap
Amazon October Prime Day is the perfect chance to nab some under-$50 gifts that feel more expensive than they are (because normally they would be).
-
The Spendthrift Trap: Here's One Way to Protect Your Legacy From an Irresponsible Heir
A spendthrift clause in an estate plan can protect an inheritance from a financially irresponsible child's debts and poor decisions.
-
Adapting to AI's Evolving Landscape: A Survival Guide for Businesses
Like it or not, AI is here to stay, and opting out could be disastrous for your organization. Instead, focus on what you can control and be flexible, as AI is still evolving.
-
Striking Gold (or Gas): A Financial Pro Unpacks the Nuances of Energy Investing
Investing in the energy industry, particularly oil and gas, involves understanding the facts about how projects generate returns through cash flow and long-term asset building, while also being aware of the risks.
-
Escaping the New Golden Handcuffs: A Financial Expert Has a Plan for Today's Executives
Feeling stuck in your job? It could be your complicated compensation package, but it also could be where you live, your family or even how you view yourself.
-
I'm a Financial Planner: Here's How to Invest Like the Wealthy, Even if You Don't Have Millions
Private market investments, once exclusive to the ultra-wealthy and institutions, have become more accessible to individual investors, thanks to regulatory changes and new investment structures.
-
Four Ways a Massive Emergency Fund Can Hurt You More Than It Helps
Saving too much could mean you're missing opportunities to put your money to work. Redirect some of that money toward paying off debt, building retirement funds, fulfilling a dream or investing in higher-growth options.
-
I'm a Financial Planner: How to Dodge a Retirement Danger You May Not Have Heard About
Timing is everything, and sequence of returns risk can mean the difference between a retirement nest egg that's overflowing … or empty.
-
Caring for Aging Parents: An Expert Guide to Easing the Financial and Emotional Strain
Early conversations, financial planning and understanding the progression of care needs can help to mitigate stress and protect family relationships.