People in our business spend an awful lot of time duking it out over whether it’s better to invest passively (in a buy-and-hold way) or actively (in a tactical manner).

Both camps are right.  It would be better if the war between passive and active would simply end.

If a customer cannot stand losing money — the capitulation or devastation point — he or she belongs in the active camp.   While it is possible or even likely the active person may lose a 20-year, head-to-head contest to a buy-and-hold person, it really does not matter a damn, does it?

The 10-year argument made a few weeks ago was that the AAII Shadow Stock Portfolio — had one followed its dictates through the end of 2012 — would have averaged about 22 percent. But most investors would have headed for the exits in 2008, when the negative return was shocking in the extreme.

It’s about comfort. The passive investor — if he or she understands risk and downticks — will be fine with the periodic killer loss. The active investor, unless bathed in good luck, may never get close to a 22 percent average over 10 years, but he or she is likely to be nice and comfy with a range between eight percent and 12 percent over the same period of time.  

Have a sensational seven days, and don’t get weirded out about things you cannot control, like how customers feel about risk.  It’s your job to figure out where and how customers should invest, not to remake their psyches. Educating customers is fine. However, if you can only stand working with passive, buy-and-hold investors and you are faced with someone you are sure should be tactical, either find an SMA that is active or refer the prospect to another advisor who likes working actively.

 

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