Investors are being advised by Princeton Professor Burton G. Malkiel (“ ‘Buy and Hold’ Is Still A Winner”) to hang in there, even when the market drops 60% of its value, as it did during 2008-2009.
But Professor Malkiel clearly has little understanding of active investment management, a valid alternative to “buy and hold” investing, which he equates to market timing.
Active investment managers use technical and fundamental research to drive their decision making. Active managers aim to reduce volatility and draw downs by using proven techniques such as hedging and stop-loss orders, as well as some of the techniques he advocates in his column – diversification, dollar-cost averaging.
The big difference is that active managers sell off when they see trouble coming. Advising my clients to sell in the summer of 2008 saved them a great deal of money that they would have lost if they followed the “buy and hold” strategy (see The Wall Street Journal, Feb. 12, 2009 for an example from Wenning Investments).
Professor Malkiel advises individual investors to keep their money in index funds and ignore the ups and downs of the market. He cites respected investors Warren Buffett and Yale’s David Swenson, who give the same advice.
But if investing in index funds is such a great idea, why don’t Mr. Buffett and Mr. Swenson follow their own advice? Active investment managers believe individual investors should benefit from many of the same techniques that these investment experts use. If we’ve learned anything from the past decade, we should have learned that investing in index funds is too risky.