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  • Writer's pictureDoug Burns

Revisiting Our Investment Approach

During times of uncertainty, investors often question how portfolios should be managed. Emotions run high and no one likes seeing the value of their accounts decline. However, it should be noted that pullbacks in the financial markets are a normal occurrence. At the same time each pullback feels different, and the causes are often not the same.

Most clients understand we take a long-term view and believe that short-term market movements are difficult, if not impossible to predict ahead of time. Because of this we employ an approach referred to as strategic asset allocation. Within this methodology, we attempt to identify the best risk profile for a client (i.e., mix of stocks and bonds) depending on their long-term goals and appetite for risk. Once the risk profile is agreed upon, we diversify stock exposure using asset classes that are expected to produce the highest long-term expected return for a given level of risk. After the asset classes are determined (and adjusted periodically), we use funds expected to best replicate the risk/return characteristics of those exposures.

For the bond portion of a portfolio, we utilize a broad-based approach (i.e., diversification) which has historically behaved differently than our stock exposure (low correlation). The current market has behaved unusually compared to many past downturns, whereby stocks and bonds have moved in tandem to varying degrees and this expected protection has not been as effective.

A common question we receive from clients during times like these, is how we are making changes to the investments? The short answer is that we are not making drastic changes. There is an abundance of evidence that shows that the driver of a long-term portfolio’s return is its asset allocation. Implicit in the decision to make a severe change to an asset allocation, based upon near-term projections is akin to “speculation” in our view.

Current prices reflect the entire market’s view of how assets should be priced, given what is known about the world economy. By selling out of assets because we believe they will decline, we are indirectly implying that we have more information than most market participants, or we better understand the implications of the available information.

There is a study published twice a year which tracks professional managers’ ability to outsmart the overall market. It is put out by S&P Global and measures active manager’s performance against well-followed market indices. These managers’ jobs are to have their investments perform better than the market. Unfortunately, the evidence is overwhelmingly clear that it is not easy to do, in any market environment. In the latest “SPIVA U.S. Mid-Year 2022” report, most managers whose job it was to outperform did worse than the overall market and worse than their respective benchmarks.

Because of this evidence, we believe the ability to “beat” the market is extremely difficult during any market. As such, we continue to believe the best way to manage long-term portfolios is to:

  1. Establish a strategic allocation based on long-term goals and risk tolerance

  2. Attempt to replicate the risk/return characteristics of chosen markets

  3. Rebalance allocations back to the strategic allocation on a regular basis

  4. Monitor long-term performance toward the stated goals


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