Active Management vs. Buy and Hold
Let us begin by immediately stating what "Active Management" does not mean.
While we describe our investing style as "active", that does not mean that we
advocate constant moves within one's portfolio of stocks or mutual funds. Rather,
it refers to an investing philosophy that employs a more "active" approach in
managing one's risk, and thus is meant to differentiate between our investment
style and the "buy-and-hold" approach.
Well-accepted studies have shown that 75% or more of the reason that a stock
(or mutual fund) moves up or down can be attributed to the overall direction of
the market. Because of that fact, and because the guidance from Wall Street firms
regarding what stocks to buy and sell has been so ineffective, we long ago decided
to concentrate our efforts in determining the level of risk in the market, i.e., which
way the overall market was more likely to go. In employing this approach, we have
been quite successful in lowering the potential risk of investing while still capturing
the growth of capital necessary for a retirement plan. In so doing, we can largely
avoid emotionally charged situations, which can often induce incorrect investment
The buy-and -hold approach, which may include types of asset allocation investing,
rests upon the conviction that the stock market moves only upward over time.
Proponents of that philosophy state that one cannot determine the level of risk in
the stock market at any given time and, therefore, it is best not even to try. Their
default advice to investors is to simply rely on that long-term direction.
There are distinct fallacies with that approach to which anyone who rode the tech stocks through the decline of the early 2000's or that of 2007-2009 can attest. Many, but not all of these fallacies stem from the overpowering forces of human nature, specifically fear and greed. For example, it is well known that the higher the market goes the more alluring it becomes to buyers of stocks. For example, evidence of this took place during the months of January and February of 2000, the very top of the stock market, when investors put $94.5 billion into mutual funds. That compared with just $18 billion during the previous year's corresponding period. It was truly a buying panic - at the worst possible time. The combination of the natural tendency to buy high and the misguided advice to "buy and hold" is a perfect recipe for disaster. Conversely, the opposite emotion, fear, invariably kicks in at or near market bottoms and causes investors to sell at the very wrong time - and miss the ensuing period of growth.
At times it is true that, if investors could but "wait it out", they may come through unscathed. However, there have been numerous, extended periods in history where the stock market went sideways to downwards over a period of many years. The 1929 high in the Dow Jones, for example, was not exceeded until 1954 and the 1966 top was not surpassed until the summer of 1982. For those investors without the luxury of a 40, or even 20-year investing horizon, sometimes waiting to recover serious losses is not an option.
In conclusion, we developed a methodology in the 1970's to help us evaluate the
amount of risk in the market. My401kPro utilizes this market risk evaluation model
to guide investors to sell when stock market risk becomes too great (at highs), and
to buy when risk levels are favorably low (at bottoms). Is it pinpoint perfect? No,
that would be impossible. However, it has consistently enabled us to assist investors
to participate in the greater portion of bull markets and to protect their investments
during the greater portion of bear markets.
Thus, our Active Management strategy has functioned well enough to meet our
objective: to outperform the market over a complete bull and bear market cycle
-- with substantially less risk. Most importantly, this approach can help 401(k)
investors adequately manage their retirement plan in order to gain the growth they
need to fulfill their retirement goals.
Lastly, along with a sound investment approach, discipline is a necessary ingredient
to achieve successful investing. My401kPro provides the sound guidance and the
tools to support the growth of your 401(k) plan. However, while it will not require a
large time commitment, your discipline will be required in implementing it.