When we think of traditional investment strategies, the ones that worked throughout much of the 20th century, we think of investment strategies that were geared for growth, but they lacked the necessary downside protection.
To put it into sports terms, traditional investment strategies focus on offense—you’re always on the field, trying to score. But to look at a portfolio that way is short-sighted. Investment strategies that hum along with near certainty are not realistic in today’s marketplace. There’s a time for growth, but there’s a time for defense as well, so you can remain in the game.
While no single factor explains the current challenges to long-held investment game plans, in the following examples, we will look at two of the key factors that have made the biggest impact on today’s need for a next-generation approach to investing:
At Beacon, we believe volatility has played the biggest role in curbing the success of traditional investment strategies. Clients, particularly as they are in or near retirement or with finite goals and timelines, want consistent returns. The power of double-digit losses can be devastating at this stage of the game, and far more powerful than gains. This volatility can then be compounded and made worse by knee-jerk buy or sell reactions, over-exposure in a single market sector, or holding on to an investment for too long “hoping” it will recover.
Technology and the influx of individual investors are two of the biggest drivers of volatility in recent years. Technology makes investing more accessible to the point that anyone can log on to a computer and place a trade. Unfortunately, those trades are too often based on emotional impulses as opposed to a rational strategy. Adding mass media to the mix, large and frequent market swings have become a new norm.
We believe globalization is the second biggest factor impacting traditional investment models. Traditionally, you could build your portfolio with a mix of U.S. large caps, U.S. small caps and add in some international stocks, emerging market assets and fixed income. With the right mix, you had diversification. Today, however, the world is so tied together and interdependent that correlation is going up every single year—much like volatility.
That traditional model of “just don’t put all your eggs in one basket” is not good enough anymore. It doesn’t work. Take a look at the S&P 500 as an example. Almost half of the 500 largest companies’ revenue come from outside of the United States at 44.3% in 2015 according to the S&P DJI’s 2016 annual S&P 500 Foreign Sales Report. You already have exposure to these markets around the world. You just don’t have direct exposure. If something bad happens in Europe, for example, you’re going to see it in our stock market. And the same thing happens with our domestic markets—we saw that most dramatically with The Great Recession and the impact that had throughout the world.
An Active Defense
Traditional investment strategies face an uphill battle in today’s markets because they lack an active defense as part of the strategy. In the traditional plans, you’re always invested, always trying to score, but the reality is things don’t always go your way. You need to defend your portfolio somehow.
At Beacon, we are committed to investment strategies that work to capture gains along with the downside protection of a strong defense through the use of a stop-loss. For further assistance on investment strategies designed for today’s markets, contact your wholesaler today!