A:

Investors have two main investment strategies that can be used to generate a return on their investment accounts: active portfolio management and passive portfolio management. These approaches differ in how the account manager utilizes investments held in the portfolio over time. Active portfolio management focuses on outperforming the market compared to a specific benchmark, while passive portfolio management aims to mimic the investment holdings of a particular index.

Active Portfolio Management

Investors who implement an active management approach use fund managers or brokers to buy and sell stocks in an attempt to outperform a specific index, such as the S&P 500 or the Russell 1000. Portfolio managers engaged in active investing pay close attention to market trends, shifts in the economy, changes to the political landscape and factors that may affect specific companies. This data is used to time the purchase or sale of investments in an effort to take advantage of irregularities. Active managers boast the potential for greater returns than those achieved by simply mimicking the stocks or other securities listed on a particular index.

Passive Portfolio Management

Unlike active management, passive portfolio management involves the creation of a portfolio allocation that is the same as a specific index. Managers select stocks and other securities listed on an index and apply the same weighting. The purpose of passive portfolio management is to generate a return that is the same as the chosen index instead of outperforming it. Because this investment strategy is not proactive, the management fees assessed on passive portfolios or funds are often far lower than active portfolio management strategies.

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