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[quote=Anonymous][quote=OTAlexFA][quote=Anonymous][quote=OTAlexFA][quote=Anonymous]Why don't I just put my money in index funds rather than you? Will your fee + the returns outperform index funds + fees?[/quote]

This one feels like a trap.   :)

In a bull market?  Maybe not.  Index funds are outstanding when everyone is making money.  However, are you going to tactically manage those passive funds?  If not, you can guess what happens when the market "corrects" (a term I don't like).  You'll get virtually 100% of the market growth now and then virtually 100% of the downcapture, as well.  There's no hedge.  As most of us know from math, if you lose 20%, it takes 25% of gains to get back to even.

Index funds are very popular, particularly on DCUM, I've seen.  I like them.  I use them.  The question is, does it fit your strategy?  What's your time horizon?  What's your goal?  Index funds are great; they just aren't a cure-all.[/quote]
NP here.  This answer is ridiculous.

Index funds get you market average returns for nominal fees.  They do that in bull and bear markets.

Active management only guarantees higher fees.  It's possible that active management will outperform or underperform in a bull market.  It's also possible that active management will outperform or underperform in a bear market.  There is nothing magical about a "hedge" that lessens the amount of your bear downcapture in a way that more than offsets the drag you feel during the bull run where you are underperforming due to holding that same hedge.  There are plenty of active managers who have overweighted cash the last 5 years as a "tactical" strategy for a correction that never happened - active managers have no magic crystal ball to know when the next correction will occur.  Your answer is just the marketing speak that active managers use to draw you away from the fact that active management, over the long run (i.e., multiple market cycles) is statistically likely to underperform the market as a whole, as it's very difficult to overcome the headwind of significant fees over the long run.

I personally use both active and passive strategies, but the simplistic notion that active management outperforms during bear cycles is disingenuous.[/quote]

All fair points, although I think ridiculous may be a bit extreme.  In short, index funds are designed to mimic the benchmark you're trying to achieve.  When that index goes down, that fund goes down virtually 1:1.  The fees, as a result of no active management, are in fact less.  Sometimes, significantly so!  However, in certain market environments and according to your client's level of risk, some products that have active management that are predicated on limiting downside capture are appropriate.  To take the most advantage of those, is there market timing involved?  Of course.  Or, it could just be part of your long-term strategy which, in that case, the OP is spot on.  You will lag behind and see higher management fees.

Again, I think the OP and I may be assuming concentrated positions in those index funds which may or may not be what the investor intends.[/quote]
OK, "ridiculous" may have been extreme.  :)

My point is that there are really two separate currents running through this discussion.  One is active v. passive (i.e., index) strategies.  The other is asset allocation.

What you are saying really is that there are some investing strategies that will lessen your downside risk at the expense of underperforming during a bull market.  In fact, it's possible that these strategies MAY even produce better risk adjusted returns over the long run.  However, those strategies can be pursued via both active or passive strategies (e.g., your index portfolio may tilt value v growth, small v mid v large, US v developed v emerging, REIT, momentum, etc.).  My objection to your post is that you're advocating active management based on things that really have more to do with asset allocation than the active/passive distinction.

You've separately mentioned market timing, which really is a third point.  Again, this can be accomplished whether you are using an active or passive strategy.  For example, when I got serious about investing about 7 years ago, I set up my own asset allocation, which included a small chunk of cash.  In early 2009, the fact that the stock market was a screaming buy seemed so obvious that I went all in and deviated from what I'd call my "base" allocation.  In my case, that basically involved purchasing VTI.  I'm now at a point where I'm in the process of moving back to my target allocation.  Again though, this is totally separate from the active v passive debate.

For many people, an advisor may be worth the money, for a variety of reasons (lack of time, lack of knowledge, need for someone to act as a buffer from your own emotional decision making, etc.).  For others, it's probably a wasted expense that adds nothing but costs.

However, answering the original question by trying to imply that indexing has some inherent flaw in bear markets is not accurate IMO.[/quote]

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