This section describes different investment vehicles and their characteristics. Management Styles Passive Management Passive management refers to managing a fund to track or simulate a target market index, so as to match, as closely as possible, the total return of that index. On the bond side, a portfolio might track the Lehman Brothers Aggregate Bond Index. Returns can be both positive and negative, tracking the movements of the applicable index. Active Management Active managers may use a market index to gauge the investment success of their portfolios, but they buy and sell securities based solely on the manager's investment judgment and market analysis.
Active managers strive to outperform whatever index they use as a benchmark.
By balancing the proportion of investments in each of those categories, balanced portfolios strive to maximize the advantages and minimize the disadvantages of the individual asset classes. The proportion of equities, bond and cash in a balanced portfolio will change, depending on which type of investment becomes favored in the marketplace. Balanced portfolios carry the same risks and rewards found in the individual asset classes described below. However, the cumulative effect of the risks and rewards may be balanced out because of the spread of investments. Cash Equivalents Cash equivalents are portfolios that purchase short-term investments like money market instruments, bank certificates of deposit and U.S. Treasury bills.