I have long been a believer in active investment management. Personal experience has taught me that having different investment styles is as important to managing risk as having different investments themselves.  

From my experience, the ability to just step out of the way when markets begin their inevitable declines, moving at least part of a portfolio to cash or a better performing asset class, is the greatest single way to reduce risk. 

However, the Wall Street Propaganda Machine, as I call it, makes it sound like passive, index fund focused, buy-and-hold investing is the only way to go.  

Up and down the line, Wall Street’s life is made easier if investors drink this Kool-Aid, just sit there and take whatever the market dishes out. Most of these firms tell worried clients “don’t sell, just be patient, the market always recovers, etc.” But if you look at what these same firms do with their own portfolios, they are extremely active traders. There is a big disconnect between what Wall Street firms want you to do and what they do themselves. 

Those guys really just want to go look for their next client and would prefer not to be slowed down having to trade your accounts. Ordinary advisers have an easier job with passively investing clients.  

The passive client business model is doable, an easy sell, and understandable for clients to wrap their minds around.  

That type of investing may seem fine until a “Lost Decade” comes around. In a Lost Decade investors have to wait many years – 19 in one period – just to get their original investment back. 19 years just to break even. Yikes! 

The chart below, from GMO Asset Allocation Insights, looks back 125 years and shows 6 different periods (loosely called decades), totaling 69 years, where the standard buy-and-hold, 60% stocks – 40% bonds portfolio, either lost money or earned next to nothing for the period. 

Those same Wall Street firms may trot out studies that validate their side of things, but now you have the cold hard facts. Think about spending 10 years waiting for your portfolio just to get back to even. I would not want to go through that, would you? 

For you math lovers, 69 years earning zero during this 125-year study means that 55% of the time the investor is “underwater” or in a losing position if you invest in passive index funds. If you expect income from your investments during this time, you are in for a really big disappointment. 

This is why all of us at Shadowridge believe in proactive management. Our traders look at every investment we manage, for every client, every day, deciding to buy more, sell or just hold. 

The Future Technologies portfolio that I manage for clients measures its holding periods in months and years. This is far different from the day-trader image Wall Street would paint of us. 

The reason I write about this now is that the current investment environment feels similar to 1999, just before the most recent Lost Decade began. When (not if) a Lost Decade begins, my experience tells me that the best way to invest will be with proactive management, a style that can move your portfolio out of declining investments into those going up, or at least more stable.  

If you are a Shadowridge client, we will already take care of this for you. You only need to do one thing – tell your friends about us. After the decline is underway and losses have been incurred, it may be too late. Please tell your friends about us now while the market remains healthy. It is one of the nicest things you can do for us, and for your friends.