Bauer Wealth Blog

Active, Passive Or Hybrid Investing Which One Is Best For You?

Nov 17, 2019 1:25:00 PM / by Chris Franz

  • Passive, active or hybrid investing?
  • Manage risk vs. simple re-balancing
  • Low cost AND value

Today, passive investing has become so commonplace that many startup investment firms are basing their entire business model solely on this approach. However, at Altruistic Investing we believe that investors need more than just low-cost investments to achieve their financial goals. They also need a way to manage risk and to distinguish between perceived and actual threats to their investment portfolio.

All financial markets are subject to varying degrees of volatility so while we certainly seek out low cost investments, we also look to reduce risk in down markets. We consider this to be more of a hybrid investment management approach because it combines passive investing with active risk management.

New Algorithmic Technology Addresses Risk
There are certainly plenty of computerized tools available for investors to use that gauge risk tolerance and create a portfolio based on specific financial goals. The robo-advisor market is surging because investors see an opportunity to benefit from wide ranging diversification at a low cost without having to take much of an active role in the process themselves.

But what if there was a way to combine actively managed strategies with the flexibility, lower fees, and transparency of passively managed products? At Altruistic Investing, we believe our new, low cost, digital model does just that by attempting to improve investment outcomes.

While we look to incorporate low-cost Exchange Traded Funds (ETFs) in our models, cost is not the only decision driver. In fact, our Algorithmic Virtual Advisor (AVA) takes into account other asset management factors including size, momentum, value, quality, and volatility.

Correlation also plays a big role in what we do. For example, if we expect two investments to have a similar return, but their prices do not move in tandem with one another, then we would consider investing in both. Our goal is to reduce the risk of similar investments going down at the same time and acting in tandem – a situation that could magnify an investor’s risk and potentially dilute returns.

So, why not follow the passive investing trend and put everything into index funds?

Arguably the most famous investor of all, Warren Buffett, has stated that most investors would be better off putting money into an S&P 500 index fund rather than employing professional stock pickers. No research is required; simply buy into the index and hold until circumstances dictate you sell.

The problem is that passive funds track the index through all market cycles, including downturns like the ones we saw in the early 2000’s and the Great Recession of 2008-2009. While it is true the broader stock market has always recovered from these events, it still takes time to restore a portfolio to the level it was at before a downturn. Time is a resource none of us can get back, and the reason why at Altruistic Investing we try to manage risk in more ways than simple diversification.

Many investors are starting to ask what will happen to their money if markets start to go down. Will a passive, once-a-year re-balancing protect them? While the “trend can be your friend” in the investment world, such trends do not go on forever. We see how passive investments have dominated the post 2008-2009 crisis, but will they hold up in a market correction?

We believe the time is right now to apply our dynamic hybrid offering to investor portfolios because we re-balance for our clients when market conditions dictate a change and not just by a calendar date as most robo-type platforms do. Managing risk in this way helps to reduce the emotional roller-coaster that many investors experience during market downturns.

So, instead of pitting active and passive investing against each other, why not use both tools to accomplish what is in the best interest of individual investors as well as society as a whole?


Chris Franz

Written by Chris Franz

Chris Franz is the CTO of Bauer Wealth Management, a Wealth Management Firm, based in Colorado Springs, CO. Bauer Wealth Management is a Registered Investment Advisor (CRD#: 152977/SEC#: 801-71090) with the Securities and Exchange Commission. This article does not represent an investment recommendation or endorsement of any kind. Please consult with your advisor regarding your specific situation. Investing in securities does involve risk of loss that clients should be prepared to bear. The risks can range from failing to keep pace with inflation to losing some or all of the money you invest.