Rowing vs. Sailing in the Investment Markets

Are you prepared for long term choppiness in the markets over the next 5 to 10 years? We don’t know what will happen short term, but I’m very confident we’re going to have choppy markets for the next 8 to 10 years. I was reading an article this week in Investment News and it was talking about the move over time especially over the last 3 or 4 years of people that have gone from actively managed mutual funds to passively managed index funds. The article suggested it has worked better over the last few years. I’ve talked on my radio show about choosing between index funds or actively managed mutual funds. My approach has been “Why not all the above?”

I want to talk to you today about the concept of rowing vs. sailing. If you are out on the river and you have headwinds, you can’t just open your sail and let the wind take care of you; you have to row in order to get where you want to go. Now, when things are going great and you have big tail winds, you can just put out that sail and let the wind do all the work. What’s the analogy there? Well, we’ve had a cyclical bull market over the last 3 ½ – 4 years. It’s easy to just put up the sail and just let it ride you down the river. Index funds in those types of markets do make a lot of sense.

However, in my opinion, when you look at the pricing of the markets, there is no way we can be on the front end of a bull market. We can’t be if you look at it in historical context. There is never a guarantee and no one knows the short term, but when I’m looking out 5 to 10 years, I see choppy markets. There’s no question if you look at the data and you look at the success, the top money managers of managed mutual funds absolutely add value when we’re in choppy markets. Up and down, up and down. I believe we’re on the front end, if I’m looking out 5 to 10 years, of needing to row more against headwinds.

I think you need to consider all of your options. Don’t fall for somebody that’s preaching “only buy managed funds” or “only buy index funds”; there are merits to both, but I do believe that the history and the science of it suggests that when we’re in choppy waters we need to be rowing. We need that active management, at least some of it, in order to get where we want, because guess what? The top managers have shown historically the ability to somewhat minimize losses when we have those bad downturns. That’s when you need the skill of a good rower.