At Baker & Company Advisory Group our philosophy is that risk should be managed not tolerated. We have always believed that a diversified portfolio should go beyond diversifying asset types. We feel that diversification of investment strategies is equally important.
There are primarily 3 different investment strategies utilized by professional money managers. The most common and best-known method is to be fully invested all of the time. This is often referred to as a buy & hold strategy. The second strategy is called active asset management. The general intent of this strategy is to move out of investments that are losing value in a bear market and move into something stable until the decline runs its course. The third option is referred to as a total return strategy. Managers following this strategy tend to be fairly active. These types of managers may follow strategies that trade both equities and fixed income. They may be in positions that are either long or short. These managers use strategies that take advantage of both bull and bear markets. This should allow for a smoother ride for the investor.
We believe it makes sense to engage investment managers and strategies that can turn volatility into opportunity. Since the firm was registered in 1987, our specialty has been Active Asset Management. We believe that all three strategies have merit and should be considered in developing a sound long-term portfolio.
All three strategies work differently and may have advantages & disadvantages in different economic environments. Unfortunately, the one that is used most of the time by the vast majority of private & professional investors’ only works well in the long-term or secular bull market.
It appears to many people, including ourselves, that we have been in a secular (long-term) bear market since the year 2000. There have been three of these in the last hundred years and they typically take over 20 years for full recovery when adjusted for inflation. In the last decade, the stock market suffered two major declines, each with losses around 50%. The popular buy & hold strategy has caused a lot of pain for a lot of people.
Consider a hypothetical couple, Joe & Mary, who retired at the beginning of 2000. They rolled their 401k of $100,000 into one of the most popular mutual funds, a Standard & Poor’s 500 index fund. They took $5,000 out at the start of each year for income. By the end of 2010, they had about $38,500 left. This means that Joe & Mary would have to earn 13% each and every year for the rest of their lives to avoid running out of money and that is not likely to happen. Let’s speak frankly, relying on the buy and hold strategy that has been promoted by so many Wall Street firms, has seriously harmed many people’s financial lives and prospects for retirement in the last decade. Sadly, there are lots of Joe & Mary’s out there.
However, it is not too late to diversify investment strategies and incorporate other ways of investing that do not depend on a bull market. Now, more than ever, it is a good time to explore ways to turn volatility into opportunity. Please remember that diversification and asset allocation do not guarantee a profit nor protect against loss in a declining market, and that is why we recommend that people consider other approaches, although there is nothing than can guarantee a profit in the securities markets. Managing risk and pursing such strategies is what we have been devoted to for 25 years.
