Why isn’t “buy-and-hold” a good investment strategy? Buy-and-hold is only good if you never need to sell your portfolio.  The markets always move up and down and better investment advisors actively adjust client portfolios accordingly. Generally, the market is on a downward slope about 1/3 of the time so this time actually is harmful to client portfolios.

Passive investing vs dynamic portfolio management

What is the difference between passive investing and dynamic portfolio management? Passive investing is the mainstay for most planners, brokers, and advisors.  It is buy-and-hold and does not change portfolio until a 6 month or a 12 month review, irrespective of market or business cycle considerations.  Dynamic Portfolio Management is the opposite and it attempts to improve return while trying to reduce risk.

Investment advisor representatives typically either sell products (funds, indexes, annuities, stocks) or brokerage-house-limited-portfolios their representatives can sell to clients.  Few advisors, like Harloff Capital Management, have the expertise or non-selling time to manage client portfolios.

Index funds own about 43% of all stock fund assets at the end of 2017.  There are only 3,485 stocks and more than 5,000 indexes.  Human money managers do not control about $7 trillion in U.S. index funds.  The large financial giants of Vanguard, Black Rock, and State Street control 88% of companies in S&P500 through passive index funds and index ETFs. For index products the market actually manages the investment, independent of if/when the market experiences bear market losses of 20 to 50%.

In contrast, dynamic portfolio managers, fiduciaries like Harloff Capital Management, have authorized limited discretionary control of client portfolios and are responsible for client returns.  Because the markets are in a down trend about 1/3 of the time, passive investments have to catch up this loss time that is hard to do.  Average active/dynamic investor return for 2005 to 2017 is 7.2%/year and beat the 5.5%/year of passive ETF funds. For traditional index funds, average return is higher with 8.4%/yr. and lower than S&P500 (+dividends) of 8.49%/yr.  Typically, about 10% of human money managers beat S&P500 return each year. Trading volume is 10% by humans, 40% passive investors in index funds and ETFs, and 50% by robots where fundamentals are irrelevant and holding times vary from seconds to minutes. .  (Source: Bogle’s Battle, L. P. Norton, Barons, pp 18-22, May 21, 2018)

Robots see trade orders before they are exercised and pay exchanges to profit by front running.