The financial planning process can be confusing and difficult, especially when you are retired or getting close. Your days as a gunslinger investor are over, or at least they should be. At this point you need the proper investment platform that matches the retirement master plan you have created for you and your family.
Too many people think investing is just throwing money at the market. Some buy the hot stocks like Apple because that’s what they read about the most. While others invest in mutual funds, believing they are properly diversified because they own a bunch of different funds, with little regard to what the funds are actually buying, if they are leveraged or what their risk level is.
For the most part, most people invest through their 401k, hoping it goes up. Let me tell you, hope is not an investment strategy!
At this point in your life, careful planning is essential. Understanding your “Standard Deviation” is important. What is your risk level, “Beta”, which is your volatility relative to the market. What’s your “Sharpe Ratio” percentage, which tells you how much return you are getting relative to the risk you are taking and “Alpha” which quantifies how much value is being added by whoever is managing your assets.
All of these are essential components used by the largest mutual funds, hedge funds and professional money managers to create the proper portfolio that manages risk and delivers returns.
There are essentially 3 styles of money management:
Tactical or “Hand-on Tactical” is the most active, as the name suggest, allowing the manager freedom to move money around depending on where the opportunities lie. There are 6 asset classes: Stocks, Bonds, Commodities, Real Estate, International and Cash, and this style uses all 6 of them. Knowing which one to use when and at the proper time is as much an art as a science. Managers who did well during the last stock market crash would have been out of stocks and real estate at that time and invested in commodities and bonds.
Another example could be investing in bonds in today’s investment climate. Many people think they need to own bonds because they are retired or they require income. However, we have just concluded a 30 year bull market in bonds and are probably entering a 15–20 year bear market because interest rates are almost certain to rise. So my question is simple: why would you own bonds if you know rates are going up and your bonds will go down?
Another style might buy and hold bonds whereas a tactical investor would avoid the sector until the prospects improve.
A good tactical manager will find alternatives that can reduce stock market risk and generate income, while not owning bonds, or any asset class that is out of favor. In addition, if a correction or crash is imminent, he will react quickly to get out of harm’s way. Most other managers do not do this and mutual funds are generally not allowed.
Strategic management can also be an active investment management style, but not as much as tactical. Here the overall portfolio is built based on macroeconomic and broad market conditions. Transactions are often less frequent and prompted by cyclical changes. For instance, a Trump portfolio looks very different than a Hillary portfolio. Rates are set to rise under a President Trump, so you must carefully consider the amount and type of bonds you want to own. In addition, small and mid-cap stocks should perform better because they stand to gain more under President Trump’s tax reform proposals and deregulation agenda. A strategic manager would adjust the portfolio to take advantage of these trends, but would not trade frequently to realize short term gains when they are present. Strategic can sometimes be a lower cost alternative tactical.
Passive investing is the “buy and hold” method, or what I like to call “buy-and-hope”! This is the most basic and most widely used type of asset management because most financial planners are not trained money managers. This style will give you lots of ups and downs which can also generate lots of headaches and sleepless nights. Many investors unknowingly have passively managed portfolios and only realize it after they have suffered big losses.
Finding the right investment style for you depends not only on your financial goals, but what appeals to your personal style. People often go with the lowest cost program which can cost much more in the long run by not achieving your objectives and or sustaining large losses.
At Springer Financial Advisors, we have been very successful using both Tactical and Passive management styles. I am not a fan of the passive buy-and-hope style. Price is usually the driving factor, as Strategic may cost a little less. Although, “Hands-on Tactical” usually pays for itself many times over in the long run. The choice is similar to buying new car where you get to pick the luxury amenities such as a nicer stereo, leather or fabric, a bigger engine etc.
Which style depends on your personal needs and desires.
To learn more about our powerful investment management program that manages risk and delivers returns simply contact us today.
As always, feel free to contact me with any comments or questions.