We’ve always admired the John Bogle philosophy of investing here at Product Guru. Something about buy-and-hold just feels right. But lately we’ve had the sinking feeling that you get when you’re arguing with someone over dinner and you suddenly realize she’s right.

At first you don’t admit it, of course, because in your mind you’re trying to tweak your own position to somehow at least give yourself a draw.

But just look at the numbers so far this year. Since January 1, the S&P 500 has dropped 9%. And even if you just consider the first five months of the year (before the recent spate of bearish bad news), it’s dropped 5.5%.

I know the bogleheads will say you can’t just slice and dice the months randomly. Instead you need to look at a longer time frame to glean anything useful. But, frankly, this is where the sinking feeling begins. Look at the past 10 years: It’s hard to explain away the fact that since January 2000, the S&P has lost more than a quarter of its value.

To be sure, it hasn’t been a steady drop. Rather, it’s been a case of some wild fluctuation, which June’s market performance can attest to. But that makes the job of investing and advising all the harder.

The opposite approach of buy-and-hold is, of course, to be tactical. Be willing to constantly shift into what you think is on the rise, and even make some gains from the drops. Forefront Advisory Global ETF Strategies is squarely in the tactical camp. Portfolio managers Dan Faucetta and Dan Weiskopf use ETFs to construct global tactical portfolios. Right now, shorting strategies make up about 10% of their holdings (mostly because of problems in Europe), and they’re looking to increase that to about 15%, they said. “We manage the downside,” Faucetta says.

Underlying that shorting strategy, though, is the broader idea of being tactical in nature. They revaluate the whole portfolio every week, and no part of it is off-limits. It’s completely tactical.
“If we could go back to a bull market like [1982 to 2000], we would be less tactical. But that’s not happening... We let the market dictate what we do”, says Faucetta.

So how does a financial advisor use all of this? That’s where this gets tricky because there is a major caveat (this is also where I may be able to argue to a draw). Even if the market isn’t conducive to buy-and-hold like it was in the 1980s and 1990s, that doesn’t mean it’s dead.
If used correctly, it actually can still have a place in your client’s portfolio. And it comes from the most practical of considerations: time management. “In practice, financial advisors don’t have the time and the resources to sit and look at a screen all day, even if this is a great idea,” says Todd Colbeck, a coach who helps financial advisors grow their businesses. “What advisors get paid to do is prospect and close deals,” he says,

What Colbeck recommends is a core portfolio that is 80% to 90% of the total, which must include some hedging element. That hedge is his way of partially managing the downside. Otherwise, when the market drops, all you can do is wait for it to come back. And that’s “painful,” he says. The remaining 10% to 20% is the tactical portion, but no more than that, he says.

So there you have it: Buy-and-hold, with a hedge, or completely tactical. Where do you fall on this?

 Read more of our The Product Guru columns here and read more of our other columns here.


Register or login for access to this item and much more

All On Wall Street content is archived after seven days.

Community members receive:
  • All recent and archived articles
  • Conference offers and updates
  • A full menu of enewsletter options
  • Web seminars, white papers, ebooks

Don't have an account? Register for Free Unlimited Access