Fortune Teller

Types of Active Investing

Fortune Teller

About 75% of investors are active investors. The most popular strategies in attempting to beat a market include stock, time, manager, and style picking. Steps 3, 4, 5, and 6 describe these strategies and explain the futility of all these methods.

Stock pickers try to pick winning stocks rather than having a fully diversified portfolio. Bond pickers can also be included in this category.

Market timers, or time pickers, try to make money by timing the markets. They think they can strategically pick specific times to get in and out of a market, believing this approach is more profitable than a buy-and-hold strategy. Time picking can also refer to the purchase or sale of individual stocks.

Manager pickers buy stock portfolios or mutual funds managed by the money managers who seem to have the best recent performance record.

Style pickers identify which style, such as large growth or small value, is the next style to perform above and beyond the others. Sector rotators and country pickers are also included in this category.

The majority of individuals in the U.S. who are currently invested in stock mutual funds holds shares of an actively managed mutual fund. However, according to data from the Investment Company Institute, equity index funds had net inflows of $30.4 billion in 2012 while active equity funds had net outflows of $183.5 billion. Furthermore, over the decade ending 2012, $442 billion has flowed into funds that are in the lowest quartile of expenses (a space that is dominated by index funds to the tune of 85%), while $368 billion has flowed out of the higher cost funds. This means more investors have come to understand the benefits of indexing.