Monday, October 11, 2010

Watch Active Management Fail in Real Time

By Arianna Capital

This is a real analysis done by a prospective client in the Dallas/Fort Worth area in Texas. We thank them most graciously for allowing us to use this real data for educational purposes.

This client was with an active manager who practiced tactical and strategic asset allocation while investing in actively manged funds. As we move through this illustration, I hope you get a real idea as to the detriment most people have to overcome before even breaking even in their accounts when practicing active management. If this account had been properly managed in the beginning, this person could have retired earlier and moved on to other dreams.

This first slide illustrates the returns of an active manger vs our asset class strategy.

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As you can see - it really doesn't look that bad. However, review the next slide to get a better indication of what this truly looks like.

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This shows a much better idea of what happened over the long run. First of all let's look at the returns. The active portfolio means 1 million dollars less than the asset class strategy over time. It also can't keep up with inflation. This really affects a client's future goals, like retirement. Now, if one wanted to learn why this occurs turn to the next slide.

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There is a significant negative affect on a portfolio due to fees and taxes. Active management generates these both in extremes. For these and the multiple reasons we have referred to in our previous blogs like the inability to foresee the future and the inability to pick stocks or time markets.

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