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.
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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.