Active choice is integral to asset management – the ability to time one’s actions and pick the strategies that will yield the best results. But it’s this element, the ease to make decisions, that can sometimes detract from the successful performance of active management. There have been numerous opinions and critiques of active asset managers, citing that their investment decisions do not match their promises of delivering stellar returns.
So how can active managers increase their chances of outperforming the market? A critical piece to the puzzle is avoiding choices that play to their psychological weaknesses. What’s important to recognize is that within any investment universe, practitioners holding onto a “long game” approach are more likely to benefit.
When making decisions to purchase or sell, asset managers must identify and assess the options available. But they must also understand that these options are fallible. Shares, currencies, or commodities can quickly change in value, and sometimes there’s no clear trend or direction. When this is the case, it is important to recognize and caution against being quick with judgement and trading decisions. If possible, it can be beneficial to wait until the market reveals a clear direction.
The key for asset managers is to understand why they’re investing in a particular asset and which other assets make sense to look into. Investors must factor in both the short and long-term plans in order to make the best choices. They must be diligent and weigh the advantageous and risks of any investment opportunity.
Managers should also consider diversifying their portfolios instead of relying solely on a single asset. Diversity in holdings oftentimes leads to a stronger portfolio and can protect against losses that a singular position may suffer. At the same time, while diversifying is important, it’s key for investors to know where they’re investing their money and have at least a basic understanding of the assets in which they’re dealing.
Ultimately, the ability of active managers to decide when to buy and sell is one of the qualities that sets them apart from passive managers. At the same time, it is also one of the qualities that can lead to underperformance if not exercised with a critical eye and a sensible approach. Active managers must err on the side of caution and only take on investments that make sense for their portfolio. This will better position them to identify and capitalize on market opportunities, while preserving their positions when the outlook is cloudy. By understanding and adhering to these principles, active managers can increase their chances of outperforming the market.