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Family Inc. by Douglas P. McCormick

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CHAPTER 13

Which Is Better, Active or Passive Investment Management? It Depends. . . .

I am exceptionally well positioned to actively manage my own investments. My day job is investing. I have a variety of subscriptions and research tools available to assist in evaluating investment prospects. I follow the markets almost every day as part of my job and as a personal interest and hobby. I have an undergraduate degree in economics and a master’s degree in business administration. I read extensively on the economy, the markets, and investing.

So you might assume that I actively manage my personal investments. I don’t. Most of my money is invested in passive (indexed) strategies. I choose active management only in markets or asset classes that have unique characteristics that require active management, such as hedge funds or private equity.

Let me explain. Over the past several chapters, we have determined the following:

  • Our investment objective is maximizing long-term real, after-tax, after-fee returns.
  • A reasonable expectation for future real equity returns is 4 to 5 percent a year adjusted for your tax and fee circumstances, with an implied long-term real premium of approximately three to four percentage points over government bonds.
  • A sound investment strategy must employ an asset-allocation model that takes account of all Family Inc. assets, not just investments, to ensure diversification and minimize risk.

With these concepts in mind, we can now effectively evaluate the ...

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