Use active investing strategies to boost returns

May 25, 2011

Given the market's volatility in recent years, you have no choice but to become active if you want to be a successful investor.

Key Points

Active investing runs counter to the usual advice we hear from financial advisers, which is that investors should buy and hold onto a mix of stocks and bonds over the long run. According to this school of thought, the trajectory of markets is inevitably upward, despite periodic dips.

Yet consider that the Fidelity Contrafund, one of the largest mutual funds in the United States, lost more than 50% of its value in the market downturn from 2008 to 2009. It lost more than 42% of its value in the 2000-2003 bear market.

MANY FACTORS AFFECT PRICES

Stock and bond prices change constantly due to a variety of factors ranging from macroeconomic forces to company fundamentals to emotion. In the latest bear market, bonds did just as poorly as stocks, and stocks across the size and sector spectrum were pummeled. Investors who use a static approach to an inherently active arena will be left behind.

Granted, few people have the time, resources, or expertise to engage in day trading. Fortunately, industry innovations now provide investors with more accessible and transparent ways to create active portfolios. The overarching principle is to balance your portfolio with diversified investment vehicles and strategies. Three categories to keep in mind:

DEVELOPING MODEL-BASED STRATEGIES

Various "model-based" investment strategies, available through financial advisers or specialized financial software, allow precisely this type of mix. Model-based strategies are developed by finding recurring market behaviors and developing statistically sound methods to profit from these behaviors.

If you blend different strategies in this way, you can achieve a balance that should help yield more consistent returns and reduce portfolio volatility. The idea is to create a mix of diversified strategies that together have the potential to provide a positive return in any market environment.

Sticking to the old buy-and-hold approach is a prescription for more losses in the next market cycle, particularly if the markets become more volatile. Trying to time trades based on emotion or market sentiment is unrealistic and unprofitable for the individual investor.

Rather, active investors combine a diversified set of strategies-bull, bear, long-term, short-term, stock and ETF-to better protect and grow their assets, come what may.

The author is founder and chief executive officer of The Connors Group, a developer of financial software for building active investment portfolios, in Jersey City, New Jersey. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you would like to see covered here, please e-mail medec@advanstar.com