Buy and Hold Is Dead: How to Make Money and Control Risk in Any Market

Chapter 10. Ahead of the Curve

Clearly, many investors experienced a significant loss of wealth during the credit crisis, so part of my job is to show them how to rebuild. Therefore, my objective is to provide a model that not only protects wealth, but one that provides an opportunity to restore wealth at the same time. We can accomplish that in one of two ways. Either we can try to pinpoint periods of weakness in advance, and hope we are right, or we can adopt a proactive strategy that reacts automatically to changing market conditions, and never look back. Proactive strategies allow us to move ahead in any economic condition.

However, first, the former is a strategy often used by professional money managers. They try to pinpoint ebbs and flows in the economy, and they skew the diversification models they use accordingly. Equity exposure still exists, of course, but they make every effort to stay ahead of the curve by trying to identify these cycles and modify their holdings. This creates two difficult scenarios. First, if they are wrong, the shift that has taken place within their managed funds will need to be parsed. Missed opportunity is the best-case scenario, though. If a period of weakness occurs instead, like the one experienced in 2008, the identification process and the repositioning they may have so prudently endured do not matter at all. Therefore, attempting to identify periods of weakness in advance can be futile even though intentions are good.

Obviously, some professionals ...