At the recent “Get Motivated” seminar in Portland, a “Get Rich” salesmen was questioning why you would pay a financial advisor 1-2% when you could do it yourself. But as my husband was quick to point out, you could pull your own teeth instead of going to a dentist, too. What a scary proposition! We pay experts because they have tools, resources and knowledge to get what we need done. The same goes with a financial advisor.
In the world of investment management, there are generally two main strategies. One is called Strategic Asset Management, commonly referred to as passive management. The other is Tactical Asset Management, or active management. In both cases, the advisor uses a variety of financial information about the markets, interest rates, and current economic conditions.
In Strategic Asset Management, the primary goal is to create a target asset mix that will provide an optimal balance between expected risk and return for a long-term investment horizon. The advisor looks at the whole household portfolio along with the age and risk tolerance of the investor, and then makes a calculated decision as to what percentage of money should be placed in each asset class. After percentages are allocated to each class, a timeline as to when the portfolio will be rebalanced to the original target weights is established. Smaller portfolios might be rebalanced annually, and larger portfolios may rebalance quarterly.
The belief in Strategic Asset Management is that it is impossible to know exactly what is going to happen with the market. Your focus is on the big picture, and the assumption that long-term, you will achieve your goals through diversification.
On the other hand, Tactical Asset Management is a method in which an investor takes a more active approach, trying to position a portfolio into those assets, sectors, or individual stocks showing the greatest potential for gains in the short-term. This is like chasing trends, since asset allocations are shifted as market and economic conditions change. An advisor relies on a set of tactics they have developed, and sometimes just plain hunches. Triggers prompt to buy after a market declines and to sell after a market rises. In essence, you are shaving off the highs and lows and taking a less bumpy ride. This strategy usually has a higher turnover ratio and increased trading, generating more transaction costs. Some also argue that this leaves an investor sharply under-invested at the market bottom.
Here at Sommers Financial we always begin with Strategic Asset Management. Modern Portfolio Theory teaches us that a diversified portfolio—taking into account an investor’s temperament and situation—rebalanced regularly, has the best chance to achieve an investor’s goals, at a lower cost than alternative strategies.
For some clients, we have implemented a “Post-Modern Portfolio Theory”, wherein we layer Tactical Asset Management on top of a Strategic portfolio. This strategy results in reduced volatility, as a portfolio is likely out of the market in major downturns, but conversely may be on the sidelines during the early stages of a boom market. This strategy helped SFM clients jump out of the market with approximately 50% of their portfolios in September of 2008, before the ‘Great Fall of 08-09’. This Tactical strategy also resulted in clients missing some of the initial jump in stocks in the Spring of 2009.
We encourage you to discuss these options with us, and help determine which portfolio strategy is right for you.