You don’t have to do it. You do not have to be tactical in your investment strategy. You do not need to try to outperform the market. You do not need to figure out which investment does better than another one. That is all a fallacy.
The goal of investing should be to try to generate returns in a manner that you feel comfortable with. This goes for any investor, whether a professional or not. Rebalancing when your allocation targets get out of whack may be all you need.
As a portfolio manager, I get pressure from others to be “more tactical”. Why? As I’ve mentioned in my last post, there are a wide range of opinions from investment professionals that have a ton of access to strong technology, intelligent people, access to knowledge that others don’t routinely get access to, and they do it as a full time job. Guess what? These professionals are paid to provide “tactical” views and no one has been consistently correct. If the professionals don’t get it right, why should you try? Maybe you shouldn’t. Or at least don’t put so much weight on it.
When I was recently “nudged” to have more tactical moves in our portfolios, I quickly revisited the past views of others and pointed out how they were incorrect on their recent “tactical” calls. By being so incorrect on their calls, they would have negatively impacted their clients’ investments.
So even though we can be tactical, should we be? If we are tactical, is there any consistent reasoning and deep research taking place?
At least based on my personal experience, if a financial advisor indicates they are going to be tactical in your account, always ask to see the research behind that view. Again, based on my experience, a lot financial advisors are being tactical based on their “feelings” of the market, and much less so on actual structural research and a repeatable process.
Check Your Emotions
Investors and financial advisors often feel the need to have activity in their accounts after the market has done something, more often than not, its after the market has declined significantly. Or, it can be when one area of the market is up substantially and investors feel like they need part of the action. Remember, don’t let emotions drive your investment decisions. That can lead to poor outcomes.
What Do I Do?
So what do I do? Please refer to my investment philosophy. I like diversification and buying low and selling high, using shorter-term valuation dislocations and a focus on investments I believe have a longer-term fundamental reason to generate returns. I try to be patient and wait for bigger moves in investments, often 15% moves in equities and 10% in credit-sensitive investments. Small moves in the markets less than that aren’t worth it to me to try to time correctly. If the markets don’t move in extremes, I won’t do anything outside of simple rebalancing when necessary.
When managing portfolios, I utilize a mix of passive and active managers. If I can get low cost exposure to the broad markets plus add in allocations to investment managers that I believe they will find the types of stocks and bonds I prefer across the global markets, I’ll take that all day. Do I think I can pick the best stocks and bonds around the world? Nope. So why should I? Why should any financial advisor?
It’s that simple. I’m not trying to shift into gold for a quick trade (which was recently brought up). I’m not trying to find a quick win in something. The only quick wins I may get is if an investment I like sells off significantly and I buy more when everyone else is selling, then that investment rebounds.
That’s it.
I sometimes hear “we don’t do anything in our portfolios”. Then I see advisors doing something in their clients portfolios to show they are “doing something” and they are often incorrect to the detriment of their clients’ investments.
People sometimes seem to forget that I allocate to passive and actively-managed investments across the investment portfolios I manage. The issue is that those financial advisors that want me to be more tactical, don’t actually understand the underlying investments I allocate to and the moves the active managers are making. In my opinion, it’s not about knowing each and every trade an active manager is making (you’ll never really know), it’s making sure these active managers focus on the types of investments you expect them to make. Their investment style is much more important to me than the intricate details of every trade.
There are some portfolios that I manage a bit more tactically, but really only when the markets move in more extreme manners. If the market doesn’t move much, I’m not doing anything and I’ll let our active managers do the tactical adjustments at their investment strategy level. I also manage a strategy that allocates to multiple more tactical managers, which I prefer. Why? I think diversification across tactical managers is a better way to not get overly positioned in any one tactical strategy.
If a financial advisor or client doesn’t see activity in an account by buying/selling positions, it doesn’t mean nothing is being done. You need to look at the actual positions and what’s happening in those positions, particularly if they are investments such as ETFs or mutual funds, where a lot of the tactical adjustments are being made, you just don’t easily see it.
Financial Advisors
Based on my experience, many financial advisors feel the need to show their clients they are “doing something”. A small trade/adjustment here and there based on “what they like”. In the worst case, they are making bigger shifts in client portfolios without any real research or investment process backing that up. Financial advisors and clients often claim that the advisor is getting paid to “do something”, which in turn the financial advisor feels the need to “do something”. I totally disagree.
When I hear stories of financial advisors tactically adjusting portfolios, and clients getting burned, I cringe. I always feel like I want to save these clients from their financial advisors. This is actually a big reason why KulwickiInsights.com exists.
I have yet to meet a financial advisor I would give my money to or put my friends and families with. For those advisors that my family is with, they utilize the investment strategies that I manage.
In times of market turmoil, financial advisors will get plenty of calls from their clients asking “what are you doing” in their accounts to protect or take advantage? This is real pressure that financial advisors feel and they feel like they’ll need to make adjustments in their portfolios. If they don’t make adjustments, they may think their clients will fire them. Although it can be difficult, the best thing for an advisor to do is to tell their client not to do anything.
Please remember that doing nothing and being patient is a real and potentially very appropriate response. Creating activity for activity sake may be the worst option.
Summary
In my opinion, keep it simple and be wary of activity for activity sake or overly “tactical investing”. Be extra wary if a financial advisor is making adjustments in your account just to show they are “doing something”. Doing nothing can often be the best thing to do.