There is a never-ending debate in the financial world about passive vs. active investing. As an active manager, you would think I’m about to bash passive investing, but the honest truth is I think there is room for both strategies in everyone’s portfolio. Here’s the problem: Everyone wants the best of both worlds. When the market goes up, they want to sit passively in their investments and watch their money grow. However, when a correction comes, they wish their financial advisor took the necessary steps to keep them from losing money.
Example 1: 2017 was a perfect year for passive (buy and hold) investing. The market barely corrected. In fact, it was one of the lowest volatility years in the past 60 years! Of course if we all knew this was going to happen, we all would have plowed into the indexes using leverage and just sat back in our rocking chairs while watching our money grow. This is an example where everyone loves passive investing but this is all in hindsight.
Example 2: In the beginning of 2016, I came into the year 50% invested for my clients. I got stopped out of my remaining positions early in the year and was down -4% (see chart below). I wrote an article for Yahoo Finance saying that I moved my clients to 100% cash and then the market had a quick -11% correction. The number of emails and phone calls I got from people freaking out was insane! People told me they couldn’t sleep, they couldn’t eat, and they lost way too much money in a short period of a time. These investors were perfectly happy when the market was going up but borderline suicidal when the market dropped quickly. This is an example where everyone wishes they had an active strategy to avoid some of the market’s decline.
Most people would say moving to 100% cash is too extreme, but keep in mind that I am constantly monitoring the markets and I have the ability to make decisions. In other words, I was simply waiting for the selling to slow down and for the market to stabilize before getting back in. If the correction got worse, I would’ve stayed down only -4% while the market could have dropped -20% or more. In early February 2016, Janet Yellen helped to soothe the markets and stocks started to stabilize. The most important thing for me is I was able to get back in for my clients from a position of confidence. While most people were scared, I was happy that I protected client assets and more importantly, protected my confidence. I was able to get back in slowly and finished the year +21% vs. +11% for the S&P 500.
I think you can have the best of both worlds if you keep some money invested passively and some actively. For the portion of you invest passively, you have to be willing to add money during market declines and this takes discipline and conviction. For the portion you want to invest actively, you have to put in the work. The biggest challenge is this involves experience, confidence, flexibility, the ability to make decisions, and the willingness to work hard at it…something most people aren’t willing to do. If you don’t have the time, I suggest finding a strong active manager who is passionate and willing to put the time in for you.
As one of those managers, I believe you can outperform the market by being in strong stocks during market uptrends and reducing exposure during the downtrends. Going through the motions and being average like everyone else is completely unacceptable in my book. One of my passions is the challenge of outperforming the market. Very few can consistently do it, but that’s why I love it…because very few can do it.
I am opening my managed accounts product on January 1, 2018 (for two weeks only). If you are an accredited investor and seriously interested in a passionate money manager, please email me to setup a consultation: [email protected]
Disclaimer: This information is issued solely for informational and educational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. None of the information contained in this video constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. From time to time, the content creator or its affiliates may hold positions or other interests in securities mentioned in this video. The stocks presented are not to be considered a recommendation to buy any stock. This material does not take into account your particular investment objectives. Investors should consult their own financial or investment adviser before trading or acting upon any information provided. Past performance is not indicative of future results.