Indexing and holding on no matter what however, has proven to be very difficult for a lot of people. Talking about the next time the market drops 40-50% today, while things are going well and noting that whenever the next big one comes it will be followed by a new high at some point will easily be accepted as true. But we’ve seen that during the heat of the decline people lose that ability to reason which is why I believe in active management.
Planning to hold on no matter what can certainly be a valid strategy but you need to hold on…no matter what which, with a nod to Marks, is where people face the greatest challenge.
For some investors of course the context of active management is trying to beat the market but as I have been saying for years, beating the market is not necessarily the most appropriate goal for every investor. Obviously it would be great to beat the market every year but where doing that becomes essentially impossible and that the conversation quickly becomes about risk taken then attempting to beat the market has to be looked at in terms of suitability.
We’ve referred many times to the 75/50 portfolio constructed by John Serrepere. The portfolio is designed to capture 75% of the upside with only 50% of the downside, note it is not a static portfolio. If successful to the last basis point it would obviously lag often but spare investors a lot of pain. Put another way, its objective is to smooth out the ride which I believe appeals to many investors and is the approach I try to take (smoothing out the ride, not necessarily 75/50).
Investors who build a portfolio that places emphasis on dividends are not necessarily trying to beat the market either. They may or may not beat the market but in trying to create a certain income stream through dividends, that is their primary objective; the income stream created.
The most important thing is giving yourself, or your clients, the best chance possible to have enough when you need it. The way you plan to get there has to be suitable for your temperament. A valid strategy ill-suited for your temperament has very little chance of success.
AdvisorShares ETF Strategist Roger Nusbaum wrote this article.