Advantages of Active Investing
Investing is sometimes like flying an airplane; hours of boredom interrupted by moments of intense activity. Anyone can handle the boredom, but during the brief bursts of activity, you need an experienced and unemotional pilot at the controls. An investment adviser provides the experienced hand at the controls during turbulence and keeps you on the most efficient path during the calm. The question is “With what kind of a pilot do you want to take a ride?"
Many investors go through an endless cycle of “chasing performance” and then getting burned through capitulation at just the wrong time. An active investment strategy strives to avoid this cycle:
- Buy and sell decisions are based on current market conditions and investment performance, not past history or future expectations
- The investment manager has the ability to respond to changing market conditions to control risk or take advantage of emerging opportunities
- Quantifiable investment approaches, free of emotional input and the “noise” of excessive information, are used
- The power of technology allows the manager to track thousands of potential investments and look for advantageous entry points
- Exit strategies are calculated and monitored for each investment
- Portfolios can be customized to the individual’s investment preferences, return objectives and risk tolerance
Detractors of active management often point out that an active manager might miss the best days of the market, substantially reducing overall returns. The flip side — the improvement in returns from missing the worst days — is rarely mentioned.
It is highly improbable that an investment manager would miss just the best or worst days. But because these two extremes often occur in close proximity during volatile, high-risk periods, an active manager could miss both the best and worst days. Missing both the best and worst days has been shown in studies of market indices to outperform a buy-and- hold position, substantially improving returns over the long term with lower volatility, regardless of whether you miss 10, 20, 30 or 40 of the best and worst days.
Data based on the S&P 500 index. For the purpose of this study, dividends were not included. The S&P 500 is an index and cannot be invested in directly.
Traditional investment approaches look to diversification to reduce risk. But while diversification may reduce individual security risk, it does not eliminate market risk. If fact, the more diversified the portfolio, the more vulnerable it is to losing money in a declining market. Avoiding broad market declines requires active management. In many ways our strategies follow some of the earliest financial advice — “Steady plodding brings prosperity; hasty speculation brings poverty.” (Proverbs 21:5). When the financial markets adjust sharply either up or down, Atlas strategies will likely trail returns for a short space of time before adjusting to the longer term trends.
Logarithmic graph of the Dow Jones Industrial Average from 1897 through 2014 using monthly data from dowjones.com. The Dow Jones Industrial Average is a price-weighted average fo 30 blue-chip stocks that are generally the leaders in their industry. The Dow is an index and cannot be invested in directly. Past performance is no guarantee of future results.