The
difference between passive vs. active management is large.
Passive management or traditional asset allocation
is an investment strategy that aims to balance risk and reward by apportioning
a portfolio's assets according to an individual's goals, risk tolerance and
investment horizon. The three main asset classes - equities, fixed-income, and
cash and equivalents – have different levels of risk and return, so each
will behave differently over time. The goal of asset allocation is to provide
the maximum level of return for a specific level of risk. If you are not going
to work with an active investment manager - which is highly recommended - then
it is an absolute must to do asset allocation.
Active management
is a dynamic asset allocation strategy that is designed to manage risk without
diminishing long-term returns. Portfolio moves are made in response to changing
market conditions. Asset allocation is adjusted on a continuous basis in response
to changing market conditions and perceived profit opportunities. This strategy
works well with mutual funds and ETF’s.
Fulkerson Capital Management is an active management Registered Investment Advisory
Firm. It is our assessment, the world equity markets are designed to take our
hard earned money. We do not trust the market. We do try to take advantage of
its good nature from time-to-time but we always remember it is out to get us,
so we stay prepared and are always ready to seek the safety of cash or hedged
positions if we perceive danger on the horizon.
The passive “buy-and-hold” or some call “buy-and-hope”
(buy and hope because asset moves are not made if stock or bond markets begin
to decline) approach became popular in the 80’s and 90’s when the
stock market went on the single best bull market in world history. Conventional
buy-and-hold worked well for two decades not because it is a timeless strategy
but because it was the right strategy at the right time. In addition, it became
popular because it is easy to execute for huge investment companies that manage
billions of dollars. If the CEO of a large Wall Street investment firm received
a message from God that the market was going to crash, he could not get everybody
out. If he did, his sales would make the market crash! So they are stuck.
And if we think our mutual funds will get us out, they cannot. Most are restricted
by their prospectus and must stay invested. A look at history shows that the
average mutual fund was 95% invested in the year 1999, and stayed 95% invested
in the year 2000, 95% invested in 2001 and 94 % invested in 2002. Obviously,
the average mutual fund has stayed fully invested through good times and bad.
Is this what you want when the markets are in turmoil? At Fulkerson Capital
Management we will do our best to move to cash and hedged investments when we
think it is warranted.
What if we employed the buy-and-hold strategy from1965-1982 when the stock markets
returned 0% for 17 years? Buy-and-hold was devastating to investors during the
60’s and 70s; it simply does not work in all market environments. Or 1929-1949
when the market returned 1.2% annually? It would be difficult to retire on those
types of returns in our IRA/401(k)/403(b)’s.
Good investing is about managing risk as much as possible and that means being
ready to act at a moment’s notice. The Oracle of Omaha, Warren Buffet
has many times repeated his top two investing rules:
“Rule number one, never lose money. Rule number two, never forget rule
number one.”
At Fulkerson Capital Management, we do not trust the market will steadily go
higher. Save your trust for your family and friends. The only thing we trust
about the world markets is that it will always be changing.
2007 Dave Fulkerson
