What is "Active" Money Mangement?
How big drops in your porfolio are devastating to your end game.
“time” the markets? If I just leave my money in stocks, or any other investment, then I will
have more money at the end, right?
Like anything else, what most Americans believe about investing is not supported by scripture or God’s word. The Bible commends the servant that received 5 talents for going and trading and making 5 more. Nowhere in scripture is there even a hint of taking the money that God gives us and putting it into one type of investment and just leaving it there, no matter what happens. Yet that is exactly what most financial advisors recommend and how most people invest. Why did God commend the servant who received 5 talents for trading? Why is active investment management encouraged in the Bible?
I believe we are encouraged to actively watch and move the money God gives us because losses hurt so much. As you can see from the graph on this page, a 30% loss takes a huge gain of 43% to get back to break even. In other words, if you have $100,000 and it drops 30% to $70,000 then you need for that $70,000 to grow by 43% to get back to $100,000. Sometimes with active money management, you will place a trade that ends up being a loss. Big deal! Sometimes with active money management a particular asset class will have a great year and you won’t do quite as well. Maybe US stocks surge 30%, one year, and your actively managed account only goes up 17%. That’s OK. In fact that can happen 5 times, and it still be OK. Why? Because in the year when a particular asset drops 40%, or more, and your account is break even or has a 10% gain, you have outperformed that asset (say US stocks) by 30-50% in that one year. But more importantly your money has avoided the huge drop that erases years of gains and takes even years to recoup.
Take a look at the graph. When your portfolio goes down 40%, like US and foreign stocks did 2008, you have to grow your money by a whopping 67% to get back to break even. And most investors, after experiencing a 40% drop, are not going to take the risk
to grow 67%. The primary reason I “time” the markets is to avoid the guaranteed crashes that come to all asset classes. “Hey, wait a minute!”, you say, “I thought you weren’t allowed to use the word “guaranteed”
The only thing I am more confident about, than big drops in every asset class, is the resurrection of Jesus. That’s it. So that is my big guarantee to you: every investment will experience a huge crash. Remember, even cash crashes when commodity prices sky rocket (otherwise known as inflation or hyperinflation)
Matthew 25:14-26 - For it is like a man who was about to take a long journey, and he called his servants together and entrusted them with his property. To one he gave five talents [probably about $5,000], to another two, to another one--to each in proportion to his own personal ability. Then he departed and left the country. He who had received the five talents went at once and traded with them, and he gained five talents more.
Ever since the carnage of 2008, my investment objective has remained clear: growth by avoiding the next big drop. An investor cannot experience long term growth, without avoiding the free falls.
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Eleven Two Fund Management is a Registered Investment Advisor (RIA) located in Marietta, GA. We are proud to be working with Christian Individuals, small business owners, and Families in over 16 states.