There are a variety of investment strategies, but two of the most well-known ones are active investing and passive investing.
I strongly believe an active approach to investing has many more advantages than the buy and hold method. The latter became very popular in the 1990s with large mutual fund company AIC even having the slogan, “Buy, Hold and Prosper.” My interpretation of this was “buy, hold and hope for the best.”
One of the issues with a buy and hold approach is that extreme market volatility can result in severe declines that take years to recover from. Compound that with the fact that many investors don’t hold through extreme market volatility and instead, fear typically causes them to make the wrong decision at the wrong time, selling out many times at the bottom and then miss the recovery, permanently impacting their portfolio. I believe it is much better to have a strategy in place that actively raises cash in stages and then puts it back to work on the rebound.
While there are never any guarantees when investing, it’s important to stick to your investment strategy throughout the market swings to continue on the path of achieving your financial goals. This doesn’t mean “buy and hold,” or “buy and hope,” but instead your strategy needs to be flexible and allow for your asset allocation to change with conditions, such as holding more cash during periods of increased risk in the markets.
It’s been a debate time and time again, does active management work?
It depends on the portfolio manager but it also depends on your risk tolerance. If you have no emotion about your portfolio volatility, have a long enough time horizon and can sleep at night with a 30 to 40 per cent decline then a buy and hold strategy can make sense for long-term returns. Simply buy a passive, low cost index fund and hold onto it through good and bad markets.
In reality, few can stomach the swings. With the volatility we have seen over the past eight weeks, many self-directed investors have come to us with their portfolios in a battered state. An extreme example would be investors with energy exposure which is down 50 to 60 per cent this year and are asking for advice, wishing that they had the appropriate risk management in place before everything changed. Most investors we come across don’t want to see this type of drop in their portfolio nor can they afford it if they are retired. It can drastically change your retirement if the recovery takes years to make back significant losses.
In comparison, active managers believe that making necessary changes is paramount to protecting your portfolio. This can include moving out of sectors that are underperforming, selling stocks that have seen a fundamental change in the business, or increasing cash positions in periods of heightened risk. This type of active management can produce better risk adjusted returns. Active managers remain flexible and can adjust client portfolios to reduce the risk of sectors that may be effected due to the coronavirus or the crash of oil. ETFs or passive investments don't make these strategic changes.
Raising cash is one of the most valuable risk management strategies. This “dry powder on the sidelines” not only protects the downside but allows you to get back into the market at more favourable prices.
Picking the exact bottom is an impossible task that no one can time perfectly but buying opportunities will present themselves to those that are watching for good value.
Active management takes time, skill, knowledge and experience. The best strategies will remove emotion from the decision making process and result in sound, logical moves that ultimately result in achieving the targeted return with less risk and volatility. This is why it’s key for investors to ensure that they have the right plan for today’s market and a strong investment team to help them navigate the markets.
Lori Pinkowski is a senior portfolio manager and senior vice president at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer any questions at 604-915-LORI or pinkowski@raymondjames.ca. You can also listen to her every Wednesday morning on CKNW at 8:40 a.m.
