Active Management

When you were eighteen, you may have loved going on the wildest rides at the amusement park. In fact, if it made your head spin that would give you bragging rights the next day at school. But you’re not 18 anymore and the last thing that you want your investments to do is to act like the Dragon Slayer at the amusement park.

Does your financial advisor use a “check the box” asset allocation method? If so, your portfolio may have more Dragon Slayer inside than you realize. In today’s volatile market environment the Ron Popeil days of “set it and forget it” may not be adequate to meet your investment needs.

Even though this statement may produce a small chuckle, there is more truth to it than meets the eye. Many of the older portfolio management systems are specifically based around a passive style of asset allocation. It’s as if the advisor simply checks off the box and then doesn’t do much to the portfolio other than just rebalance it on occasion. The theory is that by checking off all of the traditional investment boxes your portfolio will have sufficient diversification to withstand ongoing market volatility. But, what happens when the market falls outside of its normal patterns, such as in 2008? To put it bluntly, this method of asset allocation may provide very little downside protection and can become even more problematic if you are retired and taking income distributions from your portfolio.

A successful financial plan should not be dependent upon whether or not today’s markets are currently positive or negative or even whether or not we are in an upward or downward trending market. Rather, a successful long-term strategy should be focused upon effectively navigating a myriad of different market environments. Given current life expectancies, it is fully reasonable to experience 25 to 30 years of retirement and your portfolio must be flexible enough to meet the challenges of this extended window.

A great many advisors still rely very heavily on the basic check-the-box methods of navigating markets. But just as technologies have increased dramatically over the last decade, the availability of additional investment tools has as well. Many of these tools are specifically designed to address downside portfolio risk in volatile markets. When markets get extremely volatile, the emphasis shifts to strategies focused heavily on preserving capital with a specific return objective, rather than on just allowing a broadly diversified portfolio to otherwise follow the ebb and flow.

This doesn’t mean that we completely discard the more traditional portfolio strategies. There may be market environments where these strategies are not just adequate, but can also provide the greatest returns. The difference is that instead of just relying on the “buy and hold” asset diversification strategy, we are also adding a layer of investment style diversification as well, and proactively helping to manage these styles in your portfolio. As both markets and individual needs change, understanding and utilizing these additional tools can be a tremendous benefit.

*All investing involves risk including the potential loss of principal. There is no guarantee that active asset management / asset allocation will outperform a buy and hold approach to investing or guarantee against market losses. Past performance is no guarantee of future results. Individual situations may vary.