Today's medical professionals anticipate workinglonger to maintain living standards andbuild retirement assets. Unfortunately, thestate of the market isn't helping the situation.Diversified equity portfolios have gone essentiallynowhere in the past year. The S&P 500 is stillbeneath its 2000 high by more than 20%, while theNasdaq-100 needs a 130% gain to return to valuesset in 2000. Adding to the discouragement is a lookat market history. The last major sideways market inthe United States lasted 18 years from 1968 to 1986.Based on high price-to-earnings ratios, the currentmarket could easily run sideways just as long.
Buy-and-hold investing only works in rising markets.No amount of diversification will protect youfrom losses in a major bear decline or make youmoney in a sideways market. But if you are willing totake a more active approach to investing, there's considerableopportunity in today's financial markets.
Every physician-investor's first emphasis needs tobe placed on capital preservation. There's not anequity investment that you can afford to buy and forgetabout for 10 years. Once you lose money, it's toohard to make up major losses. Second, investors needto recognize that the stock market is much morevolatile than most people realize. The market movesdramatically up and down to produce a relativelymodest long-term average return. Within the broadmarket there are numerous industry, geographic, andmarket cap sectors with their own volatility. It is thisvolatility that offers opportunity for gains.
If you look at just the S&P 500 over the past 5years, there were numerous short-term opportunitiesto make money. Add in sectors such as energy andthere's plenty of room for gains in the market—butnot by using a buy-and-hold investment approach.
In place of a diversified buy-and-hold portfolio,some physician-investors should consider findingmanagers who use active investment strategiesdesigned to ride rising trends in the market, but preservecapital when the market turns against a position.Rather than using just one manager, you shoulddiversify your active management strategies.
Managers' strategies should be very carefully considered.But even the best due diligence can't guaranteegood performance. Different management styleswill perform differently in different market cycles.Strategy diversification spreads your risk.
Looking at the results of active management on areal-time basis for 20 years has provided proof thatactive management has the potential to greatly benefitinvestors, particularly in sideways and declining markets.This is a direction that needs to be investigatednow, before you lose more time and opportunity.
David Garrett is principal of the registered investment advisoryfirm Garrett Capital, Inc, based in Fruit Heights, Utah, and presidentand CEO of TimerTrac.com, providing performance rankings,charts, and commentary on participating active managers. Hewelcomes questions or comments at 800-657-2600.