Pros and Cons of different styles of investing

pros consThere are many types of portfolio construction. Before you begin to favor one over another, you should first begin with understanding investment philosophies. Aswath Damodaran has done a good job in his book Investment Philosophies.

 

Pros and Cons of Various Types of Portfolios Relative to Each Other

Portfolio Pros Cons
Actively managed mutual funds
  • Professional active management
  • Potential to beat the index
  • Good diversification
  • Commission-free purchase/redemption available
  • Broadest selection of funds
  • Higher ongoing expenses
  • Possible underperformance
  • Least transparent
  • Higher turnover
Index mutual funds
  • Very good diversification
  • Low ongoing expense
  • Commission-free purchase/redemption available
  • Seeks to match index performance (minus fees and expenses)
  • Limited selection in certain asset classes
  • No active management
  • Limited potential to beat the index
All-Index ETF portfolio
  • Excellent diversification
  • Generally low ongoing expenses
  • Can keep it simple or customize a fine-tuned portfolio
  • Transparency at end of day
  • Trading flexibility
  • Limited commission-free trading generally possible
  • Seeks to match index performance (minus fees and expenses)
  • No active management
  • Trading commissions on most ETFs
  • No potential to beat the index
Individual stocks and bonds
  • No ongoing management expenses
  • Maximum control
  • Complete transparency
  • Higher transaction costs
  • Diversification is more difficult
  • No professional management
  • Generally, low liquidity (for individual bonds)

I adhere to Dimensional Fund Advisers academic approach and investment philosophy and the application of passive indexed funds.

Further discussion in a short blog on the difference between asset classes and indexes.

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4 Responses to Pros and Cons of different styles of investing

  1. Larry Frank, Sr. September 10, 2014 at 5:16 pm #

    Here’s an article that looks at market based (passive) funds surviving compared to the active funds and other research looking at the two …

    http://advisorinsightsblog.com/2014/09/10/planner-or-prognosticator/

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