What exactly is a market? Imagine walking into your favorite supermarket. On the left is the produce and on the right the meats and fish. In the back are the dairy products and in the middle all of the canned and packaged goods. The market is a conglomeration of smaller markets brought together under one roof. The stock market is no different. It is many markets combined into one. Do you have a balanced diet of value, growth, small and large cap?
There are two approaches to managing equities. The first is “active.” This theory presupposes there is an ability to anticipate, before anyone else, market movements – to be able to see the storm clouds far enough ahead to pull out before the herd and head for shelter. Whether from specific stocks and bonds or the market in general, making the right moves requires a prescient knowledge of what will happen. Obviously, with this method you can be right some of the time and wrong others. The ultimate result will be based on how often you are correct.
The second approach is “passive.” This method adheres to the fact that markets go up and markets go down. But, over time, the “up” cycles will outweigh the “down” ones. A buy-and-hold philosophy means you will always be in the market when those upward moves occur. And while you will have to endure the down cycles, they are momentary. An active strategy means you could miss one or more of the upward moves as easily as avoiding the downward ones.
Which approach is correct? Advocates believe they both are, of course. But statistics show missing just a few days in an “up” cycle can be detrimental to your fiscal health. Over the last twenty years, the “passive” method has out-performed the “active” approach 80 percent of the time based on numerous studies. Will that hold true in the future? No one knows. However, you must have a philosophy of some kind when you manage money for clients.
Anticipating the rise and fall of markets was a common theme throughout the Boomertirement Road Show presentations earlier this year. Visit the Boomertirement Web site to learn more, and access an abundance of resources available through MDRT to assist you in working with your clients, particularly those nearing retirement.
