Investing's Active-Passive Tug of War

Using a buy-and-hold approach doesn't seem to make sense for stocks, either. The 2008–09 meltdown wiped out 10 years of gains for many investors, capping what has come to be known as the "lost decade."

In 2008, memories of tanking, volatile markets should have been fairly fresh for many investors because of the events early in that decade. From March 11, 2000, to October 9, 2002, the Nasdaq Composite lost 78 percent of its value, falling from 5046.86 to 1114.11.

In both 2008–09 and 2000–02, many people held on to declining stocks as long as possible, only to sell far too long into the slide for far too little. In such markets, you have a choice: Do you sit there and take the punishment because you expect the market to do right by you in the next 10 or 20 years? Or do you act strategically to limit the damage, preserve capital and live to fight another day?

Which style of investing is right for you? Well that depends on your risk tolerance, stage in life, investment knowledge and your experience (and your advisor's) and the goals of your investment portfolio.

I can't stand by and watch my portfolio drop, hoping to make it back over the next 20 years. Nor could I be happy owning a bunch of index funds that contain both the best-performing and worst-performing stocks.

In his best-seller How to Make Money in Stocks, legendary investor William J. O'Neil wrote: "Broad diversification is plainly and simply often a hedge for ignorance." I couldn't agree more.

This column is the opinion of the author and in no way reflects the opinion of ABC News.

Byron L. Studdard, a CERTIFIED FINANCIAL PLANNER™ practitioner, is founder and president of Studdard Financial, LLC, a financial advisory firm in Sarasota, Fla., dedicated to helping clients build wealth, protect it and pass it on to future generations. Studdard is listed in the Guide to America's Best Financial Planners (published by the Consumers' Research Council of America, an independent research organization). He can be reached at Byron@studdardfinancial.com. If you have a question for him, send him an email and he will try to answer it in an upcoming column.

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