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As The Bull Market Inevitably Comes To A Halt Investors Should Seek To Increase Active Investments


The current bull market is the second longest in post WWII history .

A market crash in the next decade is nearly inevitable.

Historically, investments have performed better in time of market adjustment.

Investors must begin to prepare for an economic downturn by shifting investing techniques from passive to active in the near future.

After over 100 bullish months, the current market represents the second longest bull market period since World War II, with the Dow Jones Industrial Average gaining over 255% since its trough in 2009.[1] The appointment of Jerome Powell, coupled with global political uncertainty and historic market trends, a crash is the market could arrive in the foreseeable future. While no one can be certain of when a bear market will hit, historically the market has proven that what comes up must come down. As investors prepare for an inevitable downturn in the economy, they must examine practices that have historically proven successful. Although returns on both active and passive investing strategies have fluctuated throughout market history, active investments typically fair better during market corrections. To prepare for an upcoming retraction in the market, investors must examine active investing strategies to try and outperform the market, even in times of recession.

            While passive investing techniques experienced a significant return over the past 10 years given the strength of the market, a market collapse may prove devastating to investors solely utilizing passive investment techniques. Defined as a style of management associated with mutual and exchange-traded funds (ETF) where a fund's portfolio mirrors a market index, passive investments do not attempt to outperform the market. Instead those investors who utilize this strategy by investing in index funds that have historically outperformed the market. Passive managers tend to accept the efficient market hypothesis, thus, concluding that stock picking is ineffective and arbitrary.[2] Passive investment strategies have come to favor over the past 5 years as returns have skyrocketed. Recency bias has caused several to write off active investing as a logical investment strategy. The graph below highlights the cyclical nature of active and passive returns.[3]

As illustrated above, in times of recession such as in the early 1900s, after the dotcom boom in the early 2000s, and after the great recession in 2009, active investments noticeably outperform passive investments. In contrast, in times of steady economic growth investments in indices and mutual funds tend to outperform active investments.

As retail investors and professional investment managers seek to optimize portfolios, it is important that they keep in mind current market conditions. After a long-term bullish market, investors should expect a retraction in the market within the near future. Although it is nearly impossible to predict a recession, investors should begin to prepare strategic activist strategies to help hedge against declines in market performance. Thorough research has been conducted on several activists techniques; yet, capricious market conditions make enlisting such strategies difficult. While activist returns certainly fluctuate depending on the success of modeling and implementation, such strategies present an opportunity for investors to continue to realize returns even in times of slow economic growth. As the market conditions continue to reflect those of other pre-recession eras, investors must begin to prepare for a time in which passive investing techniques may no longer yield significant returns.

[1] Numbers from Fortune Publishing

[2] Definition from Investopedia

[3] Data from Hartford Funds Foundation