Active Portfolio Management vs. The Buy and Hold Long-Term Investment Strategy

We have all read the following advice to investing: "The market goes up and down, but over the long-term, the trend flows in an upward course. Therefore, if you obtain and hold blue chip stocks, the value of your account will grow." A valid strategy… or is it? Proponents would say that taking one's money out of a downward trending market could result in missing the upward correction. Their advice is usually to "ride it out" when the going turns tough and wait for recovery- "don't panic". After all, you don't want to find yourself selling low. Once again, this advice may have a degree of validity, but is it only one side of the story?

Take into account these statistics…

The average total return for the S&P 500 from 1985 to 2009 was roughly 10.5%. On the face of things, if you happen to subscribe to the "buy and hold" philosophy, you would be content with this overall result. During that time period, if you happened to miss the 25 top percentage gain days, your total return declines from 10.5% down to 4.4%. Alas, the conservative "buy and hold" approach proves best. But wait, before victory is posted on the side of the holders, let's take a look at one more significant set of figures. Once again, in examining that same 25 years from 1985-2009, if active portfolio management helped you to avert the 25 worst percentage loss days, your total average return soars to 18.8%, nearly double that of those who merely rode it out passively.

These numbers definitely advocate a benefit to a more pro-active approach- yes, active portfolio management may result in the occasional loss of a short term correction, but when evaluating potential risk vs. potential gain, statistics prove that avoiding the grizzly bear bottoms of the market is far more vital to the overall health of your portfolio than cashing in on the top bull-rushing stampedes.

More compelling statistics to drive home this point…

Assume your account today is worth $100,000 when rapidly it hits a one week downward slide and loses 50% of its value. It would then be priced at $50,000. From this moment, what will be necessary for you to recoup the 50% that was lost? A 50% increase? No, a 50% increase to your now $50,000 portfolio lifts you back only to $75,000. Unfortunately, a full 100% jump will be needed to offset that 50% decrease just to get you back to the initial $100,000. Taking this into consideration, the case for active portfolio management and the avoidance of large bear declines seems to beat out a victory over the "ride it out" advocates.

So what is the right strategy for you?

With unpredictable market conditions, novice investors stand to jeopardize far too much of their hard earned savings and the days of haphazardly being able to guess and still make money are over. Seeking experienced and proven counsel from a professional is truly the only strategy that makes sense. An active portfolio manager can reduce your risk, aid you in avoiding the valleys of the market roller coaster, and increase your long-term gains. Take the time to meet with your financial advisor, learn his/her approach, and if it is in line with your goals be willing to receive and follow their advice. Together, you can eliminate much of the stress and risk associated with making portfolio decisions on your own.


Learn more about active portfolio management and decide if it is right for you by contacting John Dubots, Temecula financial advisor, with Dubots Capital Management. Dubots has over two decades in the industry and will provide a free consultation to answer all of your portfolio management questions.