As individuals, each of us is unique. But when it comes to portfolio management, while we each have distinct investment objectives, we tend to fall into two general groups for the core of our portfolios - investors adopt either an actively managed or passively managed investment approach. Why do we strongly recommend you adopt a passive portfolio management approach?

An Efficient Debate

A long-standing debate about the stock markets has been whether or not they are "efficient." The Efficient Market Hypothesis is the basis for the body of academic work known as Modern Portfolio Theory, upon which the American Law Institute built its prudent investing guidelines for trust fiduciaries.

Efficient Market Hypothesis states that markets quickly and accurately reflect available information and are setting "fair" prices for buyer and seller. Inefficient markets, in contrast, would enable a savvy investor to exploit security prices that do not accurately reflect all available information or do not respond quickly to new information.

Few would argue either extreme - that markets are purely efficient or inefficient. But those who actively invest believe that markets are at least inefficient enough to make it worth the treasure hunt.

We Can Be Our Own Worst Enemies

Despite the academic evidence, many of us still are tempted to pursue that undiscovered stock-picking method or broker who can successfully pick the winners and avoid the losers.

Behavioral economists have studied this tendency toward investor overconfidence - as well as a large array of behavioral traits (such as regret avoidance, irrational exuberance, and the endowment effect, to name just a few).

Illuminating these ingrained behavioral instincts under the light of academic scrutiny, researchers have detected numerous examples of how they can have a significant negative impact on a portfolio's long-term outcome for those who are unwary of their existence.