If not, you should be.  A passive investor spends their timeand energy controlling what they can control…the level of risk in their portfolio and the best way to provide coverage of the different asset classes that make up the portfolio.  Compare that to an active investor who spends their time and energy on things outsideof their control…like trying to determine which stock, sector, or asset class is most appropriate at a certain point in time.

In February and March of this year, many active investors decided that stocks were no longer an appropriate asset class for them.  In most cases, fear was the driving force behind their decisions.  Fear that our financial system was onthe verge of collapse.  Their fear was justified because it looked like that might be a real possibility.  We were in the midst of the worst bear market in decades and there were few signs of hope.  So, many active investors sold out of part, or all, of their equity positions in an attempt to stop the bleeding. 

In contrast, the passive investor was diversified across several asset classes, and while their portfolios had been hurt, a proper and complete diversification strategy kept them fromgetting crushed.  A passive investor doesn’t just buy and hold…they buy, hold and rebalance.  So, as hard as it was from an emotional standpoint, the passive investor was rebalancing their portfolio by adding equities during this difficult time period.

Now, a short six months later,the equity markets have staged a very impressive rebound.  The passive investor is now rebalancing by reducing some of their equity holdings that have done so well recently.  So, in February and March, the passive investor was buying equities while they were low and now they are selling them at a much higher level.  Buy low,sell high…it’s the way investing is supposed to be done.

The passive investor did not have to make any major decisions other than to stick with, and implement, their investment strategy.  The active investor who made the decision to move out of equities now faces another major decision…when, and how, do they get back in? 

I know that a lot of active investors are facing this problem because just this week, two major investment publications each ran stories advising their readers on the best way to getback into equities.  They suggest strategies like dollar cost averaging, pruning your holdings and revisiting your risk tolerance and diversification.

Confidence has returned to themarkets and the S&P 500 is now more than 50% higher than the Marchlow.  To get back in, the active investor is paying a 50% premium.

Wouldn’t it have just been easier, and a lot more profitable, to avoid those tough decisions and invest passively?