Passively Managed Money vs Discretionary Actively Managed Money…Does it Matter?

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Bill’s Blog​​                                September 25, 2020

Before we do anything, let’s define what both styles of money management are. Passive money management has become very popular over the last few decades. This investing strategy tracks a market-weighted index or portfolio. With low fees, an investor in such a fund would have higher returns compared to a similar fund with similar investments but higher management fees and/or turnover/transaction costs. Unfortunately, those who promote this management style never mention that there can be serious losses during a serious market correction or crash. Remember no one is watching over your investment, except for the markets for either good or bad.


Active discretionary investment management, by definition, suggests that the portfolio manager will be making buy and sell decisions on behalf of the client. The portfolio manager typically has a higher degree of expertise and more sophisticated tools to manage the money for the client. The manager will have superior assets available to them, hedging strategies and usually a team of experts to protect your money. The money is actively managed meaning that changes can be done for the benefit of the client whenever needed. This style of management is typically done for wealthier clients and the management fees are usually negotiated based on the assets under management; the greater the money entrusted to the manager, the lower the fees. 


Yes, we have had some corrections in the stock markets during the 2008 to 2020 period which is a healthy thing (nothing goes straight up). But more concerning is we have had two temporary crashes in the last couple years which are usually warning signs. Crashes are neither healthy nor necessary from my perspective, as they wipe out huge amounts of people’s life savings. If you do a careful analysis as many have, these crashes are sadly brought about by the policies of central planners. That’s very concerning. The people who we are supposed to trust – like central bankers and governments – are often responsible for these epic market crashes due to poor or misguided policies. 


An example of bad government policy, in my opinion, is to allow foreigners to come and buy 100’s of billions of dollars of Canadian real-estate, and not live here. This drives up home prices and rents. Governments love this because it creates huge new revenues, taxes and fees, But at what cost? Our housing markets becomes unaffordable to average people as we currently see in the majority of large Canadian cities. Young people have no way to purchase a home unless mom and dad can give them one or two hundred thousand dollars as a down-payment (few can do this). This also causes a housing bubble which will have serious consequences at some point for both individuals and lenders. 


Central banks play a key role in creating bubbles by lowering interest rates to nothing after a crash, and then continue to encourage inflation. Just so you know, inflation is a thief to your income and purchasing power. And it ultimately destroys the fiat currency. This playbook has been used 100’s of times in modern history all over the world. The “one percent” (insiders) get extremely wealthy, while the average Joe gets financially punished or wiped out. The second scheme in the playbook is to print trillions of new dollars to bail out their friends…the 1% are the first to get this new money and egregiously increase their wealth. Last week, it was reported that the 643 of the wealthiest families in the US, added over 845 billion to their wealth since the March! No surprise.


So, does it matter if you are in passive or actively managed investments? Absolutely! Especially since we are in a very over-extended economic cycle just waiting for a fresh major crash. I would want an expert portfolio manager actively managing my money in the stock market; one who has the tools, investment options (which are not available to passive funds or retail investors) to protect against the real risks of this current market. Most people cannot afford another 50% or greater drop to their stock portfolio…as happened in 2000 and 2008.


I like to educate people on risks, but more importantly, on solutions. If you have valid concerns about your invested money, possibly I can help. I work with one of the top discretionary active managers in Canada (over 22 years of experience) and we can help you if you have a 100 K of family assets…meaning it could be a combination of husband and wife assets. The commitment is first to manage risk, then performance and finally taxes. If this is our interest to you, please reach out to me. You can learn more by visiting my website at: www.fivefoldfinancial.ca or reach out to me directly at 778-539-7107 or email bill@fivefoldfinancial.ca

Best regards,
Bill

Financial Education & Honest Solutions Create Success

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