EnRich Your Life

Episode 3 - Active vs. Passive Investing: What Smart Investors Need to Know

• Season 1 • Episode 3

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In this episode, Richard is joined by Peter Corritori, Regional Vice President of Catalyst Funds, to discuss the key differences between active and passive investing. Each with over 25 years of experience, Richard and Peter delve into the benefits and risks of each strategy, offering practical insights for both new and experienced investors. They explore asset classes, risk management, diversification, and the impact of market efficiency on investment performance. Tune in to gain valuable knowledge on making smart financial choices that align with your goals.

Chapter Markers

00:51 Guest Introduction: Peter Corritori

01:23 Peter's Career Journey

03:11 Active vs Passive Investing: An Overview

05:04 Balancing Active and Passive Strategies

07:41 Diversification and Risk Management

08:50 Insights for New Investors

12:14 Tax Implications of Investing Strategies

14:36 Final Thoughts and Conclusion


Want to know more about our guest, Peter Corritori?
-Peter is a Mutual Fund Wholesaler for Catalyst funds covering Westchester, NY and CT.

Filmed and recorded at Studio on the Avenue/LMC Media
Mamaroneck, NY
https://lmcmedia.org/
Produced and Edited by Vekterly
https://www.vekterly.com/

Disclaimer: This podcast is for informational and educational purposes only and should not be considered as financial advice, a recommendation for any specific investment, strategy, or financial decision, or legal advice. By engaging with this material, you acknowledge and agree with its intended purpose. Any examples provided are hypothetical and for illustration purposes only. Neither Rich Leimgruber, the EnRich Your Life Podcast, nor its representatives are advising or suggesting any specific action or decision. Before making any financial, legal, or tax decisions, individuals should consult their own financial advisor, accountant, legal professional, or other qualified professional before making financial decisions. All opinions expressed are those of the host and guests and do not reflect the views of any affiliated financial institutions. The views shared may not be suitable for every individual or situation. Past performance is not indicative of future results, and all investments carry risk. Please note that any strategies discussed may not be suitable for all investors, and the appropriateness of any specific investment or strategy will depend on individual circumstances.

Episode 3 - EnRich Your Life Podcast - Active vs. Passive Investing: What Smart Investors Need to Know

[00:00:00] Welcome to EnRich Your Life where financial wisdom meets everyday life hosted by Richard Leimgruber, a financial advisor with over 25 years of experience. This podcast brings you powerful insights to make smart choices and build your financial future. Get ready to dive into practical strategies to grow, protect, and shape your financial story one podcast at a time.

Welcome to the EnRich Your Life podcast. EnRich Your Life Podcast is a podcast where we discuss everyday financial strategies that can help you achieve your goals. I want to give a quick shout out and thank you to LMC Media for helping us make this happen and really share all these financial strategies and stories that we're going to be telling on a monthly basis. 

Today I want to introduce our guest who is Peter Corritori who is the regional vice president of Catalyst Mutual Funds. And our [00:01:00] topic today is going to be the discussion of on passive investing versus actively managing investing.

Peter is a seasoned executive with extensive experience in leadership roles. His commitment to education and community development is obviously evident through all of his efforts that he does on a daily basis. So with no further ado, welcome Pete, and thank you for joining us here on EnRich Your Life podcast.

So I guess Peter, the first question I always ask everyone is, Tell us why you do what you do. What got you into being a regional vice president with Catalyst Mutual Funds? Yeah, 

absolutely. Thank you for having me. I appreciate it. Absolutely. I've been doing this for about 20 years.

I started right after 9 11, so there weren't that many jobs out there at that time. It was Wall Street was on a hiring freeze for a very long time. So I finally got my foot in the door at bank, a wealth manager. And I just learned my way through there. It was a lot of mutual funds. There's a lot of talking to clients.

And I found this career path that was more sales driven. It was more working [00:02:00] with financial advisors as opposed to the end client. And I went from there. I went up to Boston. I worked for the oldest mutual fund company in the world. And that really taught me about active management and how it works and why it's so important.

Was there for about five years. Went to an Asian equity manager, which was a completely different world. They were based out of Hong Kong. Offices all over the place. I got really impressed by this life. And how everyone else is living and being able to travel so much. And they were essentially a new startup in the U.S. So I really got the opportunity to see how this business works and see how the mutual fund side of things is and how it makes a company successful and really what makes one not as successful. And I've been taking that the whole time through. Yeah, it's been a great run and I've enjoyed being on this side.

Working with wholesalers like yourselves. It's interesting. It's different every single day. It's a lot of socializing. It's a lot of just knowing a lot of different things about the markets. I really have had a great time and look forward to the next 20 years of doing this. 

Yeah.

Yeah. Great. Great. Yeah. So I've been in business through, through [00:03:00] 20, 25 years, and it's the same thing. It's making sure you're keeping up with what's happening in the economy, keeping up what's happening with the markets. It's a lot of fun because every day we don't know what's going to happen and every day things change, right?

And that leads us to our discussion today about the difference between active investing and passive investing. And I think ultimately you could do both. You don't necessarily need to do just active investing or just passive investing. And for our listeners today the major difference between active investing and passive investing is really whether you're just going to be buying an index for passive investing and just letting it sit there and watching it grow, right?

 While active investing, there's a clear definition of why somebody might be purchasing one specific investment over the other. And that could be sector based, that could be the type of value approach that the investment manager is looking for. So Peter, on that topic, in your perspective, specifically on investing, what the balance between active and passive strategies what is your experience?

What is your perspective on the [00:04:00] difference between active and passive strategies? Yes. 

The way I look at it is passive is essentially you're in this rowboat. And there's no oars. So it's gonna go whichever way it's gonna go. You can't really control it. Where active is what you think about when you're looking at old school investing.

It's stock pickers. It's a portfolio manager looking at these stocks and saying, we like this. We're doing our research. We don't like this one and putting it together that way. 

 Passive is, like I said, it's just the market. The fees are going to be lower.


 A common passive investment, you always hear buying either a mutual fund or an ETF of the S and P 500, right?

So as we know, there's 503 stocks in the S and P 500 index, and that would be something where maybe it's a core holding in somebody's 401 K or, investment portfolio. And really, as an advisor Anybody can invest in the S and P 500 index, right? We all know that. And if you're in a an active investment. Hopefully you're not going down as much as the market, while if you're in the S and P [00:05:00] 500 and the market's going down, you know you're going to be down if the markets are down, right?

There's an ongoing debate about the ability of active managers to consistently outperform those markets, right? And in your experience, what factors contribute to the active managers either achieving or falling short of those goals? 

I would think, like if you look at asset classes like large value or large growth or whatever you're looking at S& P .

A lot of these are very efficient. So there's really not that many opportunities to exploit these and find opportunities that are going to outperform. But if you look at less inefficient asset classes, look at like your emerging markets. look at your alternative investments, things that have not been picked apart for so long, you're going to see a lot more opportunities. 

 Being able to uncover those opportunities and realizing which asset classes are more efficient makes it a whole lot easier for these active managers to outperform.

So I would say. It just depends more on the asset class than with the manager. But in the [00:06:00] on inefficient asset classes, you're going to see a lot more opportunities, 

right?

And, one of them that comes to mind recently is obviously AI investing. I get a lot of calls from clients asking me, Rich, what can I invest in so that I can actually get involved in these, this AI craze, right? Actively managed ETF or mutual fund that specifically only invests in companies that are involved with this AI creed.

So something like that is an example where you might not want to buy all hundred companies in the QQQ's, right? You might only want to maybe buy 40 of those companies because they're more in line with your desire for AI. So yeah. Okay, great. So how do you see risk being managed differently in passive investing compared to active investing?

And which strategy do you like better as far as protecting yourself with volatile markets? And I think you, you talked about a little briefly before about that, right? About different sectors. Yeah, absolutely. 

But like I said, I've grown up in this world. I've been in this business with the oldest mutual fund company in America, and they [00:07:00] were active.

They've been around since 1924. So they were always preaching active over passive, always active over passive. You know you're paying more, but you're getting what you paid for. 

 I think once again, when people look at risk, it's you never know what's gonna come, so it's hard to just pick when something's gonna crash or when we'd like we saw in 2008 or even 2022.

So having a split of active versus passive makes a big difference, 

right? And don't put all your eggs in one basket, right? So again, it goes back to your core portfolio could be something that's invested passively, but If you're looking for alpha, which is over that index, that's where you would look into, the active management and, passive strategies like index funds off a broad diversification, active managers take more often concentrated bets.

What are your thoughts on the importance of diversification and how it aligns with those approaches? 

Always diversify. Like you said, it depends on the client, depends on their risk and all that kind of stuff, as but I would obviously mix it up with. Passive versus active. Passive is cheap if you're going to be in the S& P, why pay extra?


So if you're in that or if you're looking for, like we said, the [00:08:00] Russell or MSCI or some sort of international play, like definitely keep it there. But the less efficient ones where you could really add alpha, that's where you're going to show your worth as a manager. 

And another example is, we talk about markets when we talk about fixed income and bonds. .

And I don't know how you feel about that. Do you, can you talk a little bit about that or how you feel about that? Like 

the way I look at fixed income, where we're sitting right now is like the AGG has been pretty much flat for the last six to eight years because equities have been doing so well and rates have been so low.

I've seen it with a lot of our portfolios. I've seen it with a lot of our competitors. It's just, the ag is so clunky. It's so backwards looking. 

And being able to find something with a higher yield, isn't that hard in these inefficient markets. So definitely fixed income is a place where you want to look more to active. 

That's great. Yeah. And for investors who are just starting out, somebody who's listening to us for the first time how would you advise them to choose between active and passive?

Are there certain life [00:09:00] stages or financial goals where one is clearly more advantageous than the other? 

Yeah, I think it depends on how much money you have, how much capital you have, it'll be equities, it'll be fixed income, they play with that based upon how much risk you want to take on.

That's what I did when I came out, I went right into this allocation fund that was well diversified, And a great way to just have exposure to all these areas without having to pay so much. But yeah, I think it depends on what you want. Some people are more risk averse, as they don't want to take it on.

They're just happy with 60, 40, 60 equities, 40 percent fixed income. Keep it cheap, or keep it in whatever else you want. But some people say, Hey, I want to try to make money. I'm young. I have 40, 50 years. I need something that's going to outperform, right? I want to live this lifestyle.

So it would be a little bit more diversified. And again, you play in those areas outside of the core, go core versus satellite, the satellites be more active. Those will be the areas where you can take out a little more risk where you're willing to pay up because they're a smaller portion of the portfolio.

But that's where you see more volatility. 

And that's [00:10:00] that's why you're hiring the manager, right? That's why you're paying somebody. So we talk about internal fees, right? And one of the things that we all know is that when we look at index investing or passive, very low cost, right? I think not to name names, but most of the S&P index funds have a 0. 03 to 0. 04 percent lower cost ratio versus maybe a manager who is actively . Investing within an ETF could be as high as 0. 4 and all the way up to 0. 75. And I guess one of the things that we, you know, when we talk about which one are we choosing, I think what happens, it comes more, it's more about it.

Look, if you have a couple of thousand dollars and you want to invest it and your risk tolerance is very high, have fun, right? Go with something that's near and dear to your heart. Maybe and. More of an active investor investment, but if you're somebody who is, who doesn't have a lot and you're just looking to start out and you don't want to feel like you're missing out, [00:11:00] right?

Because, you hear all the time where you open up the newspaper and you saw you watch online markets are going crazy right now. They're going up up, right? And sometimes, people feel like they're missing out, right? So I think ultimately, when you're a newer investor and you have, A very small amount of money that you're just looking to get into.

That's where the indexes come in. 

And I think you and I both know that when we look at what's happening in our economy, what's happening with regulations, we can't tell if the market's going up every day or going down, but we know what the trends are based upon different information that we get on a daily basis from everybody that we talked to, right?

 

When we're speaking to younger clients or even older clients, active investing is something that is anybody can do, they can open up a brokerage account at any of the major firms, and go in and just buy them. But I think when it comes to having a lot more money, that's [00:12:00] where you need certain people to help you, and guide you along the way. So is there any specific information that you would tell somebody who came to you and said, Pete. You've been doing this for 20 years. What do you think I should invest in active or passive? Like, how do you approach that? 

 

So we didn't even talk about the tax implications of active versus passive. Passive. is just an index. You're not owning the underlying stocks, so it's significantly more tax efficient.

Where active. If you have a higher tax bracket, or you pay more taxes or whatever, and you don't want to deal with high taxes, active might not be the way for you. That's why having it as a smaller portion might make sense for a lot of people. And like you said before, it's just all depends on what you're willing to do, what your risk tolerance is.

What helps you sleep at night if you want to go more active and say we're gonna take more chances with people coming to me, I would say keep your core tight And then work on the outsides, get that core down first, that'll be a great base, and then start picking away.

So some people might want [00:13:00] biotech, it all depends on the industries you work in too. Some people say, oh, I work in biotech, I really want this, or oh, I work in media, I want these names, like my wife works in TV, she has AMC, she has Disney, like a lot of these different. Companies never have their own biases based upon where they work or what they saw growing up or just what you like Some people like marvel they want to buy that like it really depends On where you are and you can always fill in the blanks there But having that core and passive makes a big difference and it's just a good base to have you always switch the other stuff around You can always switch the percentages around but I would say having a cheap Base that is just looking to participate in the markets is a great way to start.

That's awesome. That's awesome. And so we talked about diversification why diversify? It's obviously to reduce risk, right? And I think ultimately you need to have both. So we started off this conversation, say, why passive over active. And I think the answer is there. It's not. It shouldn't be why it should be how much of each.

You should have some passive. You should have some active and that's [00:14:00] diversification. Why do you want to diversify? Don't put all your eggs in one basket. And obviously when markets are volatile, you should be better off by owning more diversified investments than less. And I think that's, when somebody calls me and they say, Hey, I want to buy this one specific stock. My response is always. Tell me why. And like you said, it could very well be. My best friend works for the company, and I really like what they're doing. And so I'm always okay with somebody wanting to buy a specific stock, but I would never say take a bulk of your portfolio and buy that stock because you're taking on a lot more risk.

This has been great. Pete, is there anything else you want to add as far as what we've been talking about today? No, it's been great. It's 

been a while since I've talked active versus passive. It's always been in the active world, but so it brings me back to when I was younger and we started out just talking about active versus passive and it brings me back and it's just great memories of what I started on the desk with all these young guys who are just learning what mutual funds are.

Thank you very much for joining us today on EnRich Your [00:15:00] Life Podcast. We hope you found this information valuable. Don't forget to like and share this podcast with your friends and family and those you think who could really hear this information. 

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