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Multi-Asset Investing: A practical guide to modern portfolio management by Yoram Lustig

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18. Active versus passive investments

The active versus passive debate is unresolved. Investors who believe in the capabilities of portfolio managers to add value through security selection tend to invest in active investments. Investors who believe in market efficiency and the underperformance of most managers after fees and expenses [247] tend to prefer passive investments. While theory and probability are stacked against active management it does add an element of excitement. As Friedrich Engels put it, “an ounce of action is worth a ton of theory”.

The answer to the active/passive dilemma depends on the skill in picking skilled managers (investors who select outperforming managers add value), the tolerance for underperformance risk (passive ...

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