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When it comes to managing an investment portfolio, active management refers to a proactive and focused approach to making investment decisions. The goal of active management is to not only achieve the average rate of return on investments, but to exceed those rates. In order to accomplish this goal, people who choose to engage in active management tend to be directly involved in the growth of the portfolio, rather than taking a passive role in the process.
The basis of employing an active management strategy usually involves assembling a portfolio of investments that is a little different from the most common and popular market stocks, bonds, and equities. The active manager will be on the lookout for opportunities that indicate potential for growth beyond the benchmark index, and take steps to secure the investment while it is still relatively unnoticed by a broad range of investors.
Active management is a process that involves a great deal of effort on the part of the investor. Market research is the foundation for active investing, since the approach requires being in the forefront of identifying a good opportunity ahead of the bulk of other investors. Along with doing a great deal of research into the nature and background of a particular opportunity, active management also involves the ability to forecast potential market trends and how they will impact the performance of the issue.
The process of active management involves knowing when to sell as well as what to buy. Timing the sale in order to realize the best return on the investment is essential to the goal of maximizing the amount of funds returned on the investment. The competent active manager will draw on both market conditions and trends as part of the process. At the same time, active management also calls for the investor to draw on his or her personal experience in order to determine when to hang on to an asset a little longer, and when to sell it immediately.
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