Do you agree with this case for active management?

Active management works over the long term, provided investors can stomach the ups and downs. Otherwise, use indexing, says Jim O’Shaughnessy, Chairman and CEO of O’Shaughnessy Asset Management in Stamford, CT.

“You can do significantly better with active investing, but ONLY if you have the psychological make up to stay the course,” writes O’Shaughnessy in what he calls “my first Tweet-storm.” He points out that “true active success is measured in decades, not days,” adding that most investors give up when they underperform.

Read: How to manage a portfolio amid ‘radical uncertainty’

O’Shaughnessy says that using a three-year track record to make choices “could be the worst thing you can do.” Instead, he uses composited factors to judge stocks. For example, “my value composite uses PE; price-to-sales; EBITDA-EV; free cash flow to EV [and] shareholder yield,” he tweets.

He closes by suggesting that if you know you can’t commit to your strategy when it’s underperforming, you should “index the majority of your portfolio and add just as much active to a point where the performance of your total portfolio is something you can live with.”

Also read:

How to improve your 2017 investment game plan

Does passive investing undermine capitalism?

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.