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The Active-Passive Spectrum

Think in terms of continuity rather than conflict.

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Conflict tends to be the norm in discussions about active and passive investing approaches, but it shouldn't be. While a March 2019 article in The Wall Street Journal reinforces the idea that "few rifts in the world of mutual funds are as pronounced," [1] active and passive approaches exist as points along a continuum. Thinking about where individual strategies and portfolios fall on that scale rather than how they oppose each other is a more constructive way of evaluating investments.

At their core, passive strategies are rules-based approaches that aim to reproduce the results of a given market, while active strategies incorporate--to varying degrees--qualitative judgments about the ability of an investment to outperform that market. To grasp the passive-active continuum, it is helpful to distinguish between at least five different types of strategies, ranging from the most passive to genuinely active.

Alec Lucas has a position in the following securities mentioned above: AOFAX. Find out about Morningstar’s editorial policies.