Active Portfolio Management Vs. The Buy and Hold Portfolio Plan
We have all heard the following advice to investing: "The market fluctuates 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 portfolio will increase." A valid tactic… or is it? Proponents would contend that pulling one's money out of a downward trending market could result in missing the upward correction. Their counsel is usually to "ride it out" when the going gets tough and wait for recovery- "don't panic". After all, you don't want to find yourself selling low. Once again, this strategy may have a degree of validity, but is it only one side of the story?
Take into account these figures…
The average total return for the S&P 500 from 1985 to 2009 was roughly 10.5%. On the surface, if you happen to subscribe to the "buy and hold" philosophy, you would be content with this overall number. During that time period, if you happened to miss the 25 greatest percentage gain days, your total return reduces from 10.5% down to 4.4%. Indeed, the conservative "buy and hold" approach proves correct. But wait, before victory is declared on the side of the holders, let's take a look at one more significant set of stats. Once again, in considering that same 25 years incorporating 1985-2009, if active portfolio management enabled you to avert the 25 worst percentage loss days, your total average return shoots to 18.8%, nearly double that of those who simply rode it out passively.
These statistics definitely suggest a benefit to a more pro-active approach- yes, active portfolio management may possibly result in the occasional loss of a short term correction, but when studying potential danger vs. potential gain, statistics prove that avoiding the grizzly bear bottoms in the market is far more fundamental to the overall health of your portfolio than cashing in on the finest bull-rushing stampedes.
More compelling information to drive home this point…
Assume your account today is worth $100,000 when unexpectedly it hits a one week downward slide and loses 50% of its value. It would then be priced at $50,000. From this point, what will be required for you to regain the 50% that was lost? A 50% increase? No, a 50% increase to your currently $50,000 portfolio carries you back only to $75,000. Unfortunately, a full 100% leap will be needed to recover 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 losses seems to edge out a victory over the "ride it out" advocates.
So what is the best approach for you?
With volatile market conditions, novice investors stand to jeopardize far too much of their well earned savings and the days of just being able to guess and still make a profit are over. Following experienced and proven advice from a professional is truly the only strategy that makes sense. An active portfolio manager can minimize your risk, aid you in avoiding the valleys of the market roller coaster, and increase your long-term gains. Take the effort 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.
Take into account these figures…
The average total return for the S&P 500 from 1985 to 2009 was roughly 10.5%. On the surface, if you happen to subscribe to the "buy and hold" philosophy, you would be content with this overall number. During that time period, if you happened to miss the 25 greatest percentage gain days, your total return reduces from 10.5% down to 4.4%. Indeed, the conservative "buy and hold" approach proves correct. But wait, before victory is declared on the side of the holders, let's take a look at one more significant set of stats. Once again, in considering that same 25 years incorporating 1985-2009, if active portfolio management enabled you to avert the 25 worst percentage loss days, your total average return shoots to 18.8%, nearly double that of those who simply rode it out passively.
These statistics definitely suggest a benefit to a more pro-active approach- yes, active portfolio management may possibly result in the occasional loss of a short term correction, but when studying potential danger vs. potential gain, statistics prove that avoiding the grizzly bear bottoms in the market is far more fundamental to the overall health of your portfolio than cashing in on the finest bull-rushing stampedes.
More compelling information to drive home this point…
Assume your account today is worth $100,000 when unexpectedly it hits a one week downward slide and loses 50% of its value. It would then be priced at $50,000. From this point, what will be required for you to regain the 50% that was lost? A 50% increase? No, a 50% increase to your currently $50,000 portfolio carries you back only to $75,000. Unfortunately, a full 100% leap will be needed to recover 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 losses seems to edge out a victory over the "ride it out" advocates.
So what is the best approach for you?
With volatile market conditions, novice investors stand to jeopardize far too much of their well earned savings and the days of just being able to guess and still make a profit are over. Following experienced and proven advice from a professional is truly the only strategy that makes sense. An active portfolio manager can minimize your risk, aid you in avoiding the valleys of the market roller coaster, and increase your long-term gains. Take the effort 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.
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