The foundation of active management allocation typically rests on three key pillars: talent, cost and patience.

At Vanguard we regularly espouse the value of putting in place an investment strategy that is broadly diversified, low cost, and aligns with your long-term financial goals and risk appetite. This could be achieved in a variety of ways using index or active funds or a blend of both using a “core and satellite” approach, depending on your personal preferences and risk profile.

The core/satellite approach typically involves using index funds for the majority of the portfolio (i.e. the core) and active funds for the smaller, satellite portion.

So how does one choose which active fund to invest in? After deciding on the type of active strategy you’d like to incorporate into your portfolio, the next decision is about picking an investment manager that is likely to deliver market outperformance.

Vanguard’s approach to active management

The foundation of active management allocation typically rests on three key pillars: talent, cost and patience.

The first – talent – is about choosing a manager with proven experience and demonstrable investment abilities. They should clearly articulate what their investment philosophy is and display the ability to execute on processes that hold up to the test of time.

The next pillar – cost – is key. When comparing two managers with identical performance, the one that has lower fees inevitably results in relatively better performance as it means you get to keep more of your returns.

And the last pillar – patience – while easily understood, is probably the most important aspect. Like most things in life, good things come to those who wait, particularly during periodic bouts of market volatility. Maintaining discipline and staying the course is key to long-term investment performance and this applies to professional fund managers and retail investors alike. The benefits of a lower-cost active fund run by a talented manager are easily eroded if the manager constantly reacts in the short term, resulting in high fund turnover.

Generally, actively managed funds that have shown better performance returns over time are those run by experienced and talented managers, that have low-cost structures, and that take a patient rather than reactive investment approach.

Whether you choose an active or index investment strategy, or a combination of both – ultimately it is about finding the right balance that suits your preferences and helps achieve your long-term financial goals.

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