Peter Matthews: Many investors invest for themselves, but with poor results. The average investor earns 2% annually over the long run versus about 8% for the market. Others seek advice and are told to buy and hold a portfolio of assets like stocks and bonds. This will achieve market returns over time, but exposes the investor to large losses during their markets. Many investors cannot stomach these losses and are prone to panic, selling near the bottom. Even worse, they tend not to return to the markets until near the next stop.
The core problem is that the recommended buy-and-hold strategy is passive in the face of the unknowable future. This passive approach is dangerous by itself, but can be part of a more comprehensive investment plan that incorporates dynamic, tactical and active risk management strategies to help navigate the turbulent waters of investing.
This comprehensive approach is called investment part, representing passive, the buy-and-hold portfolio, opportunistic tactical asset allocation shifting exposure into the assets that have been performing best and away from the poorly performing assets, and defensive risk management rules to automatically exit assets that are falling, moving the proceeds to cash until those assets start performing better.
This systematic three-pronged approach to long-term investment is a better way of controlling your financial future because it diversifies across strategies as well as assets. The vast majority of the world's wealth is invested in passive long-only portfolios, on the hope that markets will go up over 10-20 year periods. The investment part enables you to take a more proactive approach to dealing with the huge uncertainty about future market moves, it puts you in control dynamically reacting and adapting to the way the future evolves. It lets you choose the right allocation across strategies to fit your return and risk objectives.
Academic research has shown combinations of these strategies have where that markets twists and turns in a smoother way that buy-and-hold alone. This is the new paradigm, a person will invest in.