5.3.3.3. Active vs. Passive Management
Under an active portfolio management model, the portfolio manager or investor regularly searches for opportunities to maximize her return. This means buying and selling securities to take advantage of the best opportunities in the market, capturing gains when an investment’s rise has slowed or stalled and moving on to another investment. Active portfolio management styles, theoretically, have the greatest chance of outperforming the market, if that is something that matters to an investor. Additionally, actively managed portfolios can hypothetically limit a portfolio’s risk if a manager is able to move out of a position, sector, or market prior to a large drop.
However, an active management style comes with a number of distinct downsides.