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Why Active Is Better than Passive in the Market

If you’re like most of us, chances are good that much of your retirement money is held in a 401(k) or other tax-deferred retirement plan that is allocated to stock markets and bond funds.

Stock Market Video

Why Active Is Better than Passive in the Market

This Week’s Fortune Cookie

In Case You Missed It


In this week’s Stock Market Video, Mike Cintolo talks about his continued neutral stance, as the major indexes continue to chop sideways and most stocks are doing the same. He’s sticking with his game plan of being very selective on the buy side, and practicing patience with the leading stocks he owns. That said, he is seeing some positive signs, especially with regard to set-ups, and reviews a handful of the highest-potential stocks should the market kick into gear. Click below to watch the video.


Why Active Is Better than Passive in the Market

Today, I’m offering a simple meditation on risk and active asset management.

According to the standard wisdom (Wriston’s Law, specifically), money will go where it is wanted and stay where it is well treated.

In practice, this means that money tends to move to where it commands the greatest return on investment. Money wants to make more money, and it will (adjusted for risk) flow toward the assets and instruments that will let its number increase.

But the profoundly screwed up condition of the global economy in the years since the Great Recession have created some puzzling anomalies in global capital flows. Take, for instance, the phenomenon of negative yields on sovereign bonds, which are bonds issued by governments. (U.S. Treasuries are an example.)

Sovereigns are among the most secure of instruments ("... backed by the full faith and credit of the United States government”) and grow more popular when investors are feeling threatened by conditions in stock markets and global economies. This is the “flight to safety” that we hear about from time to time.

But within the past few years, we have had market conditions that were, at times, so unsettling, that money in Europe (via the investors who controlled it at the time) sought out sovereign bonds that were paying negative interest. That means that investors were, in essence, willing to pay a government to hold their money for them. Things were so threatening that the prospect of losing just a half a percent or so per year actually looked like the best alternative.

If you’re like most of us, chances are good that much of your retirement money is held in a 401(k) or other tax-deferred retirement plan that is allocated to stock markets and bond funds. And chances are even better that you, personally, don’t ever make any adjustments to your allocations, much less decide to make purchases or sales of individual stocks.

As with many simple, blunt-instrument tactics, this system is better than nothing, but it has some serious drawbacks. At the extremes of probability, there was the Tech Bubble and the Real Estate Bubble. If you were just sitting there watching your retirement account with your hands in your pockets (which is what you were told to do by the asset managers), you lost not just your shirt, but two shirts and probably a pair of pants, too.

But even leaving out those two torpedoes below your account’s waterline, every day that you let the movement of the market be the only factor influencing your investment results is a day that you fully accept market risk.

If you want 1) to control your market risk, 2) to seek returns higher than market returns and 3) to involve your self actively in the success of your retirement funding, you have to get involved!

The best way to control risk is to embrace it. You control it by actively finding investments that allow you to improve your odds and then following a set of proven management rules.

And what are those rules? Well, if you’ve been reading Cabot Wealth Advisory for a while, you probably already know. For growth investors like me, they boil down to, first, staying in step with the major trend of the market. (In other words, not just sitting there like a rabbit on the freeway while a major market correction turns you into a pizza.) Second, you buy high-quality growth stocks with excellent prospects and hold them while they kite higher. Third, you ruthlessly prune losers before they can undercut your results.

Cabot has three investment advisories that specifically address the growth investing strategy, but for anyone just getting started, I always recommend Cabot Growth Investor, a full-featured weekly strategy guide that tells you what to buy, when to buy it, when to sell and when to hold on. Cabot Growth Investor will teach you everything you need to know to get out of your passive investment stance and take charge of your investments.

So don’t just sit there like a bunny in the fast lane. Click here to get active.


Here’s this week’s Fortune Cookie. Remember, you can always view all previous Fortune Cookies here and Contrary Opinion buttons here.

Tim’s comment: In the stock market, everyone’s entitled to an opinion-in fact that’s what makes the market! But those supported by the characteristics Douglas Adams enumerates are more likely to prove profitable.

Paul’s comment: I think I stacked the deck, picking this quotation to use in today’s issue. It’s really just a continuation of my thoughts on expertise. Still, it’s always good to hear from the author of Hitchhiker’s Guide to the Galaxy. I think his famous advice, “Don’t forget your towel!” sounds like a reminder to stay prepared for whatever the market throws at you.


In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.

Cabot Wealth Advisory 5/11/15 - Are Stocks Overvalued?

Cabot Dividend Investor’s Chief Analyst, Chloe Lutts Jensen, writes about the relative valuations of stocks and bond yields, which became a headline question after Fed Chair Janet Yellen’s recent remarks. Stock discussed: Aflac (AFL).

Cabot Wealth Advisory 5/12/15 - Four Rules for Measuring Expertise

I write in this issue about the challenge of finding experts who know what they’re talking about and won’t use their reputation to sell you snake-oil. (Even with their limits, I still prefer experts to random Twitter advisors.) Stock discussed: NetEase (NTES).

Cabot Wealth Advisory 5/14/15 - Time for Sector Rotation?

Dividend Digest and Investment Digest Editor Nancy Zambell takes a careful look at the sectors that perform best in the various economic cycles, and recommends some ideas for you to consider in the current market.

Have a nice weekend,

Paul Goodwin
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory

Paul Goodwin is a news writer for Cabot’s free e-newsletter, Wall Street’s Best Daily.