From an early age, you have probably heard that you can be a successful investor by just picking out a few mutual funds or a few blue chip stocks and consistently saving money into those funds and stocks. Diversify your risk among several funds and you will be golden into your golden years. In fact, that is what you will hear on most of the financial news networks and, perhaps, even your own advisor. Did you ever think about who pays for advertising on CNBC, Bloomberg, and Fox Business? Mutual fund companies, brokerage firms and others whose incentive is for you to be invested all the time. Is it any wonder then that those same networks would continue to spout the company line? BUT…
There is a better way. Bills Asset Management has been tactically managing client portfolios for over 25 years and has a track record to prove it! So what is the difference between tactical management and buy and hold (hope) investment management.
Buy & Hold
With a buy and hold (hope) approach, an investor buys a number of mutual funds and/or stocks and then hopes that they go up. Changes to the portfolio are rarely if ever made. If done right, the portfolio is diversified such that all the holdings don’t go down at once but that only goes so far. In the bear market of 2008, diversification was turned on its head as ALL asset classes declined in unison and the result was losses somewhere in the range of 30-60%. It was even worse in the bear market of 2000 where the technology stocks of the NASDAQ lost over 80%! Granted buy and hold works… until it doesn’t. And when it doesn’t it will cause catastrophic, and often life-changing, losses to investor portfolios. Do you know about the mathematics of investing? In short, losing money is bad – very bad. And worse yet, if those losses come as you are nearing or in retirement, they will likely seriously challenge your standard of living. Tactical management offers a solution.
The Math of Investing
Initial Investment: 100,000
| A | B | ||||
|---|---|---|---|---|---|
| Year 1 | 35% | 135,000.00 | 20% | 120,000.00 | 57% of Gain |
| Year 2 | 25% | 168,750.00 | 10% | 132,000.00 | 40% of Gain |
| Year 3 | -40% | 101,250.00 | -10% | 118,800.00 | Avoid 75% of Loss |
| Year 4 | 20% | 121,500.00 | 10% | 130,680.00 | 50% of Gain |
| Cumulative | 40% | 30% | |||
| Real | 21.50% | 30.68% |
Tactical Management
Tactical management is day to day management of your investment portfolio that seeks to be in the best investments at all times. Risk management is at its core. If the market is doing well and risk is low, then it will be 100% invested. On the other hand, if risk is high and the markets are struggling then it will be in cash. During uncertain times, tactical management will be somewhere in between fully invested and fully in cash seeking to provide the best risk adjusted returns possible. No investment does well in all markets and, therefore, it makes logical sense to move to the best performing funds. What is doing well today is not necessarily what will be doing well tomorrow, next week or next month. As a tactical manager, we seek to be in the best investments – the market leaders. We strive to capture 75% of an up-trending market while avoiding 75% of a down-trending one. Achieving this leads to market like returns with a fraction of the risk. You can see hypothetical results of achieving this goal below.
Consider it this way. When you travel and put on your cruise control do you just leave it on for all driving conditions. If there is traffic, rain, snow, etc. do you take over the wheel, slow down, or even pull off the road if things get really bad? Where else in your life do you make a decision and then not adjust as conditions change? Why should your investments be any different?
So why are most advisors of the buy and hold variety? Frankly speaking, it is much easier and involves little to no work on their part. Set it, leave it and find new clients. Unfortunately, that is the way many advisors work. However, tactical management takes much more time, attention and expertise. And we believe it is far superior! So much so, that we manage our personal assets just like our client assets.
If you still have questions, we would love to have a conversation with you! Just give us a call or drop us an email.
Sam and Bo
Hypothetical Results of Tactical Management
A buy and hold approach would buy the index in 1997 and hold through 2016.
Tactical management would seek to capture 65 or 75% of an up market and avoid 65 or 75% of a down market.
Initial Investment: 100,000
| Actual S&P 500 Returns | Balance | Capture 65% & Avoid 65% | Balance | Capture 75% and Avoid 75% | Balance | |
|---|---|---|---|---|---|---|
| 1997 | 31.01% | 131,010 | 20.16% | 120,157 | 23.26% | 123,258 |
| 1998 | 26.67% | 165,950 | 17.34% | 140,986 | 20.00% | 147,912 |
| 1999 | 19.53% | 198,360 | 12.69% | 158,884 | 14.65% | 169,578 |
| 2000 | -10.14% | 178,247 | -3.55% | 153,245 | -2.54% | 165,279 |
| 2001 | -13.04% | 155,003 | -4.56% | 146,251 | -3.26% | 159,891 |
| 2002 | -23.37% | 118,779 | -8.18% | 134,288 | -5.84% | 150,549 |
| 2003 | 26.38% | 150,113 | 17.15% | 157,315 | 19,79% | 180,335 |
| 2004 | 8.99% | 163,608 | 5.84% | 166,507 | 6.74% | 192,494 |
| 2005 | 3.00% | 168,516 | 1.95% | 169,754 | 2.25% | 196,825 |
| 2006 | 13.62% | 191,468 | 8.85% | 184,783 | 10.22% | 216,931 |
| 2007 | 3.53% | 198,227 | 2.29% | 189,022 | 2.65% | 222,674 |
| 2008 | -38.48% | 121,949 | -13.47% | 163,565 | -9.62% | 201,253 |
| 2009 | 23.45% | 150,546 | 15.24% | 188,496 | 17.59% | 236,648 |
| 2010 | 12.78% | 169,786 | 8.31% | 204,155 | 9.59% | 259,331 |
| 2011 | 0.00% | 169,786 | 0.00% | 204,155 | 0.00% | 259,331 |
| 2012 | 13.42% | 192,555 | 8.72% | 221,950 | 10.06% | 285,413 |
| 2013 | 29.60% | 249,551 | 19.24% | 264,653 | 22.20% | 348,775 |
| 2014 | 11.39% | 277,975 | 7.40% | 284,256 | 8.54% | 378,569 |
| 2015 | -0.73% | 275,945 | -0.26% | 283,520 | -0.18% | 377,878 |
| 2016 | 9.54% | 302,271 | 6.20% | 301,101 | 7.16% | 404,916 |
Buy and Hold Balance from 1997-2016: 302,271
Capture 65% of Gains and Avoid 65% Losses from 1997-2017: 301,101
Capture 75% of Gains and Avoid 75% Losses from 1997-2017: 404,916
Key Takeaways
- The buy and hold return was essentially the same as capturing 65% of bull markets and avoiding 65% of bear markets.
- Returns are greatly enhanced by capturing 75% gains and avoiding 75% losses.
- Volatility is greatly reduced by avoiding losing money in bear markets (ie portfolio losses in 2008 were a manageable 13.47% and 9.62% versus a potentially life changing buy and hold loss of 38.48%)