Thanksgiving Day is rapidly approaching and I am truly thankful that I chose 21 years ago to take charge and begin helping my clients manage their investment portfolios!  We are currently experiencing one of the most severe Bear Markets that this country and the world have seen in the past century. As of November 12 the broad stock market in the US was down almost 46% since October last year. We now have another great example of how our “Active Management Strategies” have significantly reduced market losses and we continue to substantially out perform the stock market for the past 10 years. You can rest assured that we are carefully watching the situation and have your portfolio in an extremely conservative position. We are not effectively in stocks at this time and will maintain this position until we are convinced that it is time to make further adjustments.

During the past few weeks I wrote an article about “Active Management” which was published on several dozen websites and search engines earlier this week.  I thought you would enjoy reading it so we have included it below.

We wish you and your family a wonderful Thanksgiving Holiday!

Sincerely,

Phil Couture, President, CFP®

Couture Financial, Inc.

Active Management Key to Surviving a Bear Market

Looking for a winning strategy in today’s tough financial marketplace?  You might try following singer Kenny Rogers’ advice in “The Gambler,” his big 1970s song: “You’ve got to know when to hold ‘em and know when to fold ‘em.”

In a volatile world, it no longer makes sense for investors to follow a passive “buy–and-hold” strategy, waiting for those stocks to increase in value through the years.

Instead, you should consider an active management style for your portfolio, taking steps to reduce your losses in a declining market and preserve your capital so you have more to invest in the future.  It’s a flexible approach followed by many savvy investors, including T. Boone Pickens, the legendary Texas entrepreneur, who recently told a CNBC interviewer he moved his holdings completely into cash a few weeks ago. 

For many decades, investment professionals have debated whether a passive or active management approach delivers higher returns.  The theory behind a passive approach is that no one can “time the markets” – forecasting upward or downward moves – so an investor might as well hold onto those assets indefinitely.  Of course, real life isn’t that simple and even passive investors may need to make adjustments in their portfolios from time to time.

Another type of passive strategy is the “fixed allocation” approach.  That means an investor and financial advisor or 401(k) provider devise an individual portfolio based on a desired rate of return and ability to tolerate risk. It’s a sound approach that forms the foundation for most successful investment plans. However, the allocation among types of assets – stocks, bonds and cash, for example – doesn’t vary, even if there is a significant change in market conditions.

 But Paul Samuelson, an MIT professor and one of the nation’s leading economists, has pointed out the big problem with a passive strategy: “The longer one holds a stock, the more certain it becomes that he will encounter a significant market upheaval.  Risk does not go down with time, it goes up!"

That’s certainly true with Wall Street’s market cycles, According to a study by NDR Research, there have been 33 bear markets since 1900 as measured by the Dow Jones Industrial Average.  The median decline has been a drop of 26.9 percent over a period of 363 days. This year, the Dow fell 29.9 percent as of October 6, the 363rd day since its most recent market peak. Unfortunately since October 6th it has fallen an additional 10.16% as of November 7th which makes it one of the most severe bear markets in the past 100 years.       

For most investors, the worst pain in a bear market comes from seeing the loss of principal in their accounts, such as when a stock worth $50 a share falls to $25 a share. But there’s another type of loss that doesn’t show up on the monthly statement, but can be even worse. Inflation reduces the purchasing power of your assets over time – a major drawback to passive investing.

Looking back over the past eight years, inflation averaged 4.4 percent annually.  Therefore, investors needed an overall gain of 26.1 percent from September 2000 to October 2008 just to maintain their purchasing power.   However, a typical investor who maintained a fixed allocation portfolio actually lost 30 to 35 percent, according to statistics from STIR Research News.

With the President-elect and Congress debating a new stimulus on top of the $700 billion bailout and the high level of U.S. debt, inflation is almost certain to return at some point in 2009.  And investors will need to adjust their strategy once again to address this threat.

For investors, the conclusion seems clear: an active management strategy is best suited for today’s fast-changing global marketplace.

Phil Couture is president and founder of Couture Financial, Inc.,, Sarasota, holds the professional designation of Certified Financial Planner (CFP®). Since founding the firm in 1977, Couture has helped thousands of clients achieve their individual investment objectives with minimum risk.