You can invest in active funds but decide to passively manage fund units. Or, you can invest in passive funds but can actively manage investments. Arguably, any investment decision you take could be an active decision. For instance, whether to invest in a bank deposit and in which bank to keep the deposits. In this article, we look at the active decisions relating to your core (goal-based) portfolios.
Active decisions
We define active decisions as those that deviate from a default process. Consider the decisions you must take relating to core portfolios. You must determine asset allocation for each goal — the proportion to invest in equity and bonds. The default proportion is based on the return needed to achieve a goal. This is dependent on four variables — time horizon for a goal, inflation-adjusted amount required to achieve the goal, expected return on equity and bonds and the amount you are willing to save to achieve the goal. But if you were to decide asset allocation other than the default allocation, you are taking an active decision.
Having decided the allocation, your next step is to decide on the benchmark index for equity investments. The default choice is the broadest index available in the country you invest in. But if you choose, say, a large-cap index, you are making an active decision. Next, you must decide whether to invest in a passive product (index fund or an ETF) or an active product. The default is a passive product. If you were to choose an active product, you are making an active decision. A default investment for bond allocation is bank deposits. Your default process must also include the frequency and the process to rebalance your investment portfolios.
Conclusion
Why should you be mindful of active decisions? Such decisions expose you to future regret. The more you deviate from the default process, the more the likelihood of future regret. This does not mean you should not deviate from the default process. It means you must have a good reason to do so. That is why it is best to draft a default process to create and manage your core portfolios. The default process is the same whether you invest for an eight-year goal or for your retirement that is far away. Importantly, it makes you mindful of the risks and the potential rewards when you take active decisions.
(The author offers training programmes for individuals to manage their personal investments)
Published on June 30, 2025
