There are two primary methods of investing. One method is active management where the investment manager attempts to beat the market with investment strategy and actively buying and selling investments.

The second method is passive management where investment managers structure investment vehicles that attempt to mirror market indexes giving you the market return of whatever index you are tracking.

Active management is hands on management and costs more than passive management. Index funds, an example of passive management charge an investment advisory fee of around 1/5 of a percentage point for managing your funds. An actively managed fund can charge 1-2% on your investments. To justify the actively managed fee your investment return must out perform the market to make that fee worthwhile.

The actively managed market remains the largest part of the investment management market. So, there are many people that believe they can choose investment managers that can consistently beat the market.

If you are not sure you can choose the right investment managers, another approach to investment strategy is investing in passively managed funds that give you a market return and risk at a lower cost.

Two primary passive investments, Index funds and ETFs have become a larger and growing part of the overall investment market.

Vanguard created the first index fund for retail investors in 1975. John Bogle, the founder of Vanguard, is a strong believer of “you get what you pay for.”

Index funds are mutual funds that are structured to track the return and risk of a major index such as the S&P 500. Index funds are around 11% of the market.

ETFs or exchange traded funds are securities that track an index, but trade like a stock and have become as large a segment of the market as index funds. ETFs are 70% controlled by 3 firms, BlackRock, State Street, and Vanguard.

Investment advisory fees are only one type of fee that is paid by investors. There are also continuing fees and expenses such as fees for record keeping, taxes, legal, accounting, and audit fees.

Mutual Funds publish an expense ratio that is a ratio of expenses divided by the dollar value of the investments. Morningstar and Lipper both track fund expense ratios to help give you some comparisons. Your 401k/403b/457 plan also publishes the expenses it charges you to manage the fund.

So, do you know how much of your portfolio is actively managed or passively managed? Do you know what expenses you are paying on your investments? Are your investment returns exceeding the expenses you are paying?

Kowalczyk recommendation: Investopedia is an easy way to look up investment terms.

Kowalczyk comment: Many young people gravitate toward target date funds in their 401k/403b/457 plan. These funds automatically keep your account balanced between stocks and fixed income investments to an age appropriate level. These funds start out with a higher percentage of riskier assets when you are young and adjust to a more conservative mix as you near retirement.

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