Certainly for those who enjoy life here in paradise, a simple day at the beach offers a relaxing and even therapeutic getaway from the rigors of daily life. Although having an elaborate plan fits the bill at times, clearly sometimes less is more.
The same case can be made for investing and portfolio management. While the majority of retired investors seem complacent about their same old “plain vanilla” stocks and mutual funds, at some point in this current stock market rally, the case for “less is more” will become front and center. It is unfortunate that for many, a complete market meltdown with meaningful losses is the only catalyst that can bring perspective to the concept of “less is more”.
Obviously, in this case, we are referencing the asset allocation model which implores a 100 percent stock exposure approach. On the surface, many investors can grasp the idea of owning less in an effort to gains more diversification, only in this case, the concept of diversification can get lost in the euphoria of a rising stock market, regardless of how or why.
Luckily, while “the Trump effect” continues to hold and the market continues to set records on a nearly daily basis based on both market levels as well as length of time between market corrections, not to mention valuations, there is no need for the stock managers to justify anything. As long as the monthly statement continues to remain steady, many retired investors simply sit idle awaiting the next shoe to drop.
By now, it is clear that in this case, the less would be referring to less stock ownership in lieu of diversification among alternative asset classes, including, but not limited to, insured index investing as well as the addition of managed futures to the portfolio mix. The unfortunate side effect of such an unprecedented market run is that it lulls many retired investors into a false sense of security. Clearly now is the time to reduce exposure to stocks and allow a portfolio to perhaps thrive when the markets finally experience some type of corrective action.
Research has illustrated that in many cases, the implementation of an insured index strategy can complement virtually any stock portfolio. It is critical here to stress that referencing the addition of alternative investments does not in any way eliminate the stock portion as an acceptable asset class. Rather, the concept of diversification relies on the case of simply using a percentage of the portfolio for assets other than stocks.
Imagine the power of capturing even a percentage of the markets return in good times while avoiding any and all market based losses along the way. In fact, simple math tells a compelling story. Although the research is a bit dated back to December of 2015, the numbers can be startling. During the 15 year period from 2000 to 2015, a $100,000 investment in the Dow Jones average grew in value to roughly $155,000. Now, consider the same $100,000 investment in the Dow Jones average during the same 15 year period capturing only 50 percent of the Dow’s returns, yet avoiding the down years with a zero return, grew the investment to roughly $186,000. Here is a clear and concise representation of the classic “less is more” concept. Less exposure to market losses resulted in approximately $31,000 difference in values … more money from less return.
The value here is that clearly it is not as important how much we make in the up years; rather it is critical how much we keep and do not give away in the down years. Yes, sometimes less is more!
Again, here lost on the average investor is that these are not wholesale portfolio moves, as much as they are small rebalancing adjustments which give the portfolio more resiliency during the tough times. This same concept can be experienced by the addition of the alternative assert class of managed futures…again…only as a percentage of the overall portfolio.
Managed futures ability to reduce risk while at the same time increase returns certainly gives credence to the concept that less stock exposure when combined with a complementary asset class can lead to the life of a SWAN, Sleep Well At Night.
William F. Hague is a managing partner of Hague Wealth Management; 239-389-1999 or WFHague@earthlink.net. The opinions and observations stated above are those of the columnist.