If we accept that, we can see that it applies to all fields of endeavour — it is something we all do every day. Its latest report, The Stubborn Gap , draws on its Organizational Climate Survey of more than , employees from 1, companies over a five-year period. Human appetite may be hard to control. To become better risk-takers, employees will firstly need:. This goes hand in hand with enhanced cooperation and teamwork.

The final factor is accountability. Good risk-takers take personal accountability for outcomes — feeling the glow when it goes well and the pain of failures is critical — and the knack is working with these emotions, learning and improving from both. Line managers must strive to ensure that their team develops a risk appetite in line with that of the organisation, but this is challenging see the Princess Leia point earlier. If the organisation restricts or overstretches employees, they will become frustrated or stressed.

Line managers are also key to assessing where someone feels reluctant to take risks and explore the personal, cultural and organisational issues that inhibit them. For many years, companies have been hardwiring their organisations to take on more risk by recruiting and developing people with a high achievement motivation. The desire to achieve clearly has beneficial results for businesses. But companies need a range of effective systems to manage that behaviour and prevent it getting out of control. Successful risk management also relies upon managers being able to extend their influence beyond the confines of the risk function itself.

Persuading other business areas to take shared ownership, responsibility and a consistent approach to risk management is a hallmark of success. While many see Richard Branson as a brazen entrepreneur who thrives on risk, perhaps he should instead be viewed as a successful risk mitigator. Despite numerous knock-backs, George Lucas saw the potential of Star Wars and the value of merchandising and sequel rights.

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The chart compares the rolling monthly 3-year performance percentile rankings for active managers with that of passive managers ranked within the Morningstar Large Blend category. FIGURE 2 shows that while overall there is no clear winner over the past 30 years, there has been a clear winner in active vs. Once again the recent outperformance of passive is evident, and is preceded by 11 years of dominance by active management, and so on. Many so-called active funds closely mirror the indices that serve as their benchmarks.

The problem, of course, is that this modest objective may not offer a real upside to justify the fees associated with active management. By examining active share, investors can get a clearer picture of how an active manager is adding value, instead of relying upon returns alone. Markets that feature large amounts of home runs signal dispersion in stock returns. High dispersion should benefit active managers who can single out the winners, whereas a low number of home runs indicates stocks are moving together, which typically benefits passive management.

The average number of home runs during this time period was Sure enough, in years that feature a high number of home runs, active tended to outperform. And when there were fewer standouts, passive was the clear winner.

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So what does cyclicality in active and passive management performance mean for you, the investor? We believe it demonstrates the importance of maintaining perspective and sight of your investment goals over time, and minimizing the undue influence of fickle market sentiment as you navigate changing market cycles.

Instead of letting recent performance enchant you into chasing returns, you should instead consider current market conditions and what the future could hold. Active managers have the flexibility to seek out opportunities in undervalued sectors, while passive investments are locked into the sector allocations determined by the index. Like speed limits on highways, market corrections are a necessary evil in investing, but not one to be feared.

They keep markets from becoming overinflated and prevent valuations from reaching heights that lead to damaging crashes. They can also provide opportunities for active management.

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The most recent market correction arrived in February When corrections occur, you may not want to be exclusively invested in passive. Instead, you may want to consider investing in actively managed funds. There have been 27 market corrections over the last 35 years. FIGURE 6 shows that during those corrections, active outperformed passive 19 times, with an average rate of outperformance of 1. By allowing investors to respond to ever-changing markets, active management empowers investors to maximize opportunity as conditions demand.

For example, during the collapse of the dot-com bubble in , active management outperformed passive significantly, When bull markets inevitably turn, passive managers could be left holding stocks and sectors with poor fundamentals and inflated valuations. Meanwhile, active managers have the ability to help mitigate risk by reducing exposures to expensive areas that will be hit hardest, and conversely, increase exposure as sectors or asset classes recover to capture upside as the new market cycle begins.

This insight focused on active vs. Yet even this category shows the cyclical nature of active and passive performance.

Far from it. We believe that the choice between active and passive management is not a zero-sum game, but that each has a place in investor portfolios based on the individual needs and wants of the investor. With that in mind, here are some conclusions to take away from this piece:. Talk to your financial professional about the benefits of incorporating active management into your portfolio.

Alpha is calculated by comparing the volatility of the portfolio to some benchmark. The alpha is the excess return of the portfolio over the benchmark. In addition, it does not take into account the specific investment objectives, tax and financial condition of any specific person.

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This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Investing involves risk, including the possible loss of principal. Recent performance has favored passive investing.