ITA Wealth Management

What is Passive Management?

Passive management makes no attempt to determine which securities are better than other securities.  Passive mangers are not timing the market, nor are they in the business of stock picking.  Market returns within specific asset classes is an acceptable return for a portfolio. Passive investors construct portfolios based on their tolerance for risk. For example, to reduce risk, the conservative passive investor will include bonds and a higher percentage of large-cap stocks in the portfolio. An aggressive passive investor, willing to take on more risk, will reduce the percentage held in bonds and might concentrate the portfolio in smaller cap asset classes. The passive investor maintains their long-term asset goals through portfolio rebalancing. Passive investors use ETFs and index funds to populate their portfolio, and once established, they are not frequently shifting investment strategy.

While some passive investors construct their portfolio around market sectors, ITA Wealth Management recommends using asset classes so as to provide better portfolio diversification.  Using market sectors tends to over-weight the portfolio in large-cap stocks.

The basic asset classes used by passive investors includes large, mid, and small-cap value and growth asset classes.  Some investors will expand the “Big Six” to include core asset classes in the three cap sizes.  In addition to the U.S. equities holdings, we add developed international, bonds, emerging markets, REITs, and possibly commodities.  Larger portfolios might include international REITs and international bonds.  For very large portfolios, private equities and venture capital are additional asset classes.  We are assuming our readers are smaller investors so we limit our asset classes to eleven or twelve.

Over on the Premium Content side of ITA Wealth Management, we do have a few portfolios we call Mosaic Portfolios.  This is where we add a few highly selected individual stocks for the purpose of increasing diversity and reducing portfolio risk.  Mosaic investors are not pure passive investors as some active management is involved.  This approach is not recommended for the average investor.  If possible, stick with the basic asset classes.

As mentioned many times on this blog, it is not difficult to come up with the asset classes.  These are the materials one uses to build the “investment house.”  How to put these materials together is the difficult process.  This is where we use a particular software program to provide assistance in knowing what percentage of our dollars to place in each asset class.  Real money portfolios are in operation on the Premium side and help is given to readers wanting assistance in portfolio construction. 

Premium subscription available for $6.99 per month.

Ceremonial Music for Trumpet and Symphonic Organ is the CD recommendation for this week. This is a “wow” recording featuring composers: Charpentier, Purcell, Mouret, Bach, Schubert, Martini, Clarke, Mendelssohn, Paradis, and Handel.  Rolf Smedvig is on the trumpet and Michael Murray plays the organ.  The clarity and quality of the recording is up to Telarc standards.  This is definitely a five star recording.

Photograph:  Image captured in Southern France.