Investors today are faced with the task of choosing from a wide variety of strategies when seeking to invest their money. Advisers and institutions are increasingly concerned that the buy-and-hold strategies employed successfully in the past may not work well going forward.
The traditional asset allocation of 60 percent in domestic equities and 40 percent in domestic bonds and, apart from a little rebalancing, holding these positions indefinitely appears increasingly archaic.
With high equity and fixed income valuations and low corporate earnings expectations, combined with rising interest rate forecasts, relying on financial markets to deliver historical average returns increases the risk that clients will not be able to achieve their financial goals. If you don't regularly compensate for changing market conditions, you are overlooking the fine print of every investment advertisement that says, "past performance is not an indicator of future results."
In my last article, "Before you buy an annuity," I spoke to some of the concerns I had in relying solely upon annuities to avoid market risk. An alternative or even complement would be Tactical Investment Management. Tactical management establishes a balance between protecting capital and pursuing growth. It incorporates a dynamic management process, which can adjust to changing market conditions. The following guidelines can help you to incorporate a disciplined process of incorporating tactical principals.
Control the process
The market doesn't care what the investor wants. When applying standard asset allocation, the investor often hopes that the market will conform to his plan, leaving the market in control. Tactical investment management adjusts portfolios to meet changing market conditions, allowing the investor to remain in control.
Growth is important, but it's also crucial to protect against large long-term loss. A 25-percent loss requires a 33-percent gain just to break even.
While some fluctuation of capital cannot be avoided, guarding against large long-term loss is possible. Show respect for your capital; consider moving to cash or a cash equivalent during major bear markets. Always strive to protect against large long-term loss.
Identify market trends
Tactical investment management can analyze the underlying patterns and identify the trends behind the current market condition. This is accomplished by applying complex quantitative market analysis, including a combination of technical, fundamental and geopolitical economic conditions. Adding the impact of domestic and world economic news can provide a full spectrum view of market activity and likely impending changes in trends.
Move assets on verification
Making changes in portfolio allocations should be done only when major market trends dictate, not on hunches or predictions. The technical speculations of typical market timing approaches should be avoided.
Greater scrutiny and extra effort is demanded in today's market climate. Tactically managed portfolios provide the freedom to reshape the allocation and, in doing so, change how risk is typically managed. At any point in time, depending on market conditions, changes allow a reduction in portfolio volatility in anticipation of bear markets, or an increase in volatility in anticipation of bull markets.
While analysts are free to find the best value propositions anywhere in the world, they are not free to turn a conservative portfolio into an aggressive one.
Our uncertain global economy presents a new paradigm for investing. While growth is important, knowing how to protect the wealth you have accumulated is equally important. Tactical investment management can be a good complementary strategy to help you reduce risk and provide some necessary growth to your retirement income needs.
Gardner Sherrill, CFP, MBA, provides oversight and guidance for a successful retirement. Visit sherrillwealth.com. This information is not intended to be a substitute for specific individualized tax or legal advice. Individual circumstances will vary. Please see your tax professional regarding your specific situation.