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Roger Aliaga-Díaz, Vanguard Global head of portfolio construction, joins Brad Smith on Wealth! to break down how investors how to think about passive and active investing options when building their portfolios.
Aliaga-Díaz tells Yahoo Finance, “There is no better environment for active, to be frank… Usually, in election years or around Fed moves, those are periods in which perhaps some active managers can add value to the portfolios as opposed to investors trying to play those events in terms of asset allocation. So I would say in general, these are periods in which active management can add value, definitely in the portfolio. The question is how much, right? How much of the portfolio [is] into active management [and] how much in a strategic passive position?”
He explains that while some investors may view the active versus passive debate as an “all or nothing” play, that might not be the best move for most. “Traditionally, investors have always thought in terms of outperformance. Can active managers beat the market to outperform, right? And that has led traditionally to a more of a binary choice. All or nothing. If you think that your active manager is going to outperform, go 100% active. And if you’re more passive, like saying the active managers cannot outperform, you go 100% passive.”
Aliaga-Díaz says, “What we propose in the Vanguard framework for active [and] passive is more of a blend. As you start thinking about the probability of outperformance as opposed to a certainty.” He notes investors should consider the risk of some periods of underperformance for both strategies and take into account their own risk tolerance. “So you factor those things in a framework, you can come up with an optimal blend, like [the] best blend of active and passive in the portfolio where you diversify the risk, but you still got some upside for that active management.”
For more expert insight and the latest market action, click here to watch this full episode of Wealth!
This post was written by Naomi Buchanan.
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