If you watched television or listened to the radio six months ago, it felt like the world might be coming to an end. Talk of a “return to the Great Depression” dominated the media. Politicians did their best to scare everyone to death. Fear ran rampant thanks to media hype and political meddling, and stocks responded to these nightmarish scenarios by hitting the lowest levels in 12 years, with many financial stocks losing 90 percent of their value.

In an effort to stem the overwhelming tide of fear, we created a presentation called “Is The World Ending?” In short, we didn’t believe it was the end. We believed the entire situation had evolved into unwarranted panic and fear, and we advised clients to become fully invested.

As we expected, the March lows were the market bottom. Since then, the economy has moved back from the precipice. In mid-July, we wrote several articles stating we believed the recession actually ended around June 30. Since the March lows, the U.S. market has gained 50 percent, retracing a good portion of the losses since last fall. Many of the international markets have come back even stronger, with the emerging markets leading the way.

Buy and Hold?
So, after all of this market drama, what is the best way to invest? Wall Street, mutual funds, stock brokers and financial planners all pitch “buy and hold” as the best way. Buy and hold is the most “promoted” investment strategy there is. John Bogle, founder of Vanguard Funds, is the poster child of the buy-and-hold strategy. He endorses it with evangelical zeal. Buy and hold is an investment strategy where you simply buy an investment and then hold it indefinitely. In theory, as the markets move up and down, your investment moves up and down, but over time you are rewarded.

Active management is a strategy where you are constantly adjusting your portfolio to what the market is doing. Unlike day trading, most active strategies are trying to capture intermediate term (three to 18 months) moves.

There has always been a debate whether buy and hold or active management is better. Since this is such an emotional debate, let’s look at the numbers.

In mid-October, the Dow Industrials moved above 10,000. Everyone cheered. The last time it hit 10,000 was about a year ago, on its way down. Looking longer term, the Dow Industrials first hit 10,000 back on March 18, 1999. That was more than 10 years ago. During that 10-year period of time, faithful buy-and-hold investor’s returns have been almost non-existent. When you factor in inflation, the returns are actually negative.

The Dow paints a relatively positive picture. Let’s say you invested in the NASDAQ (which represents 6,000 stocks) more than nine years ago on March 10, 2000. Buying and holding the NASDAQ from March 10, 2000 through Oct. 16, 2009 would have given you a loss of 57 percent. Out of curiosity, just how much longer do the buy and holders recommend you keep holding the NASDAQ?

Active Management
At Paragon, we are proponents of active management. And the numbers back us up. Both of our actively managed portfolios are doing extremely well year-to-date. Stocks trounced bonds, small cap and mid cap stocks outperformed large caps, and emerging markets outperformed all asset classes. Fortunately, that is where our models positioned us, and it is why our portfolios once again outperformed their benchmarks. Our conservative portfolio, Managed Income, is up 11.93 percent year-to-date, through Sept. 30 — more than doubling the 5.72 percent for its benchmark, the Barclays Bond Index.

Our growth portfolio, Top Flight, is up 27.7 percent year-to-date, through Sept. 30 — versus 19.3 percent for its benchmark, the S&P 500. Since January 2007, Top Flight is down only one percent versus its benchmark, the S&P 500, which is down 21 percent during the same period. Since its inception in January 1998, Top Flight has gained 337 percent versus only 33 percent for the S&P 500 index.

Active management does work.

Paragon cannot guarantee the accuracy of information from other sources. Opinions are as of the dates indicated only. This report is not a solicitation for any security. Past performance is not a guarantee of future results. Investment performance reflects time and size-weighted geometric composite returns of actual client accounts. Investment returns are net of all fees and costs. The S&P Index is a diversified, size weighted index of 500 stocks.

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