Investment Strategies

Investment Strategies

Most investors and financial planners take a passive approach to asset allocation. They put a portion of their portfolio in large cap, small cap, growth, value and international equities and some into bonds. Then they sit back and hope the market takes care of them. To us, this approach seems uneducated, even counterproductive.

Passive asset allocation theories, such as the popular Modern Portfolio Theory, are based on solid fundamental beliefs. However, they only work well during secular bull markets such as the stretch from 1982 to 2000. Passive asset allocation worked during the 1990’s because virtually all asset classes increased in value. During secular bear markets there is no reason to sit and watch a portion of your portfolio that is in a particular asset class drop by 30%, 40% or even 50%. A good example is the large cap growth asset class during 2000 – 2002. During these times active management is necessary to reduce risk and volatility in your portfolio.

Instead, these theories should be used merely as a starting point to build an asset allocation model that is appropriate for your unique financial situation. However, there is no one particular asset class that will consistently provide growth year after year. As the financial markets and economic conditions continually change, investors have to be flexible and dynamic, seeking to reduce exposure to certain asset classes and focus, at times, on others. Only through a tactical approach to asset allocation will risk be managed and volatility reduced providing you consistency to your portfolio in all types of market environments.

You cannot rely on Wall Street research or the media to forewarn you of major changes in market leadership. Nor can you rely on secular market trends to always be positive carrying all asset classes up simultaneously.