With baseball investment strategies, there is no consistence. It’s a matter of feast or famine. For example, a baseball player who strikes out 200 times and has 50 home runs in a year is similar to an aggressive investor who has really good years and really bad years. Statistics are interesting and can reveal different scenarios based on a specific timeframe.
Assume two portfolios have the same average return and those returns are allocated differently, there will be spikes of positive outcomes in each portfolio. However, overall production will show a negative return over time.
Conversely, a more consistent player with more base hits, more runs, and a lower strike out percentage will have a different output. Although averages may show a similar statistic, losses are significantly less with the more consistent return. You do not get crowd thrilling home runs, but you do get more hits and runs with less errors.
Traditional Buy and Hold Strategy
When looking at a traditional buy and hold investment strategy, be aware of what happens in different economic cycles. In an expansionary cycle, growth-oriented investments have recently lost a great deal. However, they will increase as the economy re-inflates.
When that expansion eventually peaks, you will see more conservative investments working in the absence of growth. This isn’t an abnormal cycle; it’s just the way things seem to work.
As a cycle declines, you find a great deal of despondency because previous growth strategies are no longer trending upwards. This often causes investors to flock to safety-based investments.
In a buy-and-hold methodology, you find rebalancing at one of these flex points. Due to technology and speed, the investment world isn’t as strategically defined as it once was. Whether an investment is good or bad depends on when you are measuring it. The best investment accurately reflects the current economic environment.
A growth investment, perhaps best purchased at the beginning of an expansionary period of time, would be more appropriate than a conservative investment such as a treasury bond (which may be a more appropriate investment tool during a recessionary economic period).
So, is one better than another or is one more timely than another? Buy-and-hold with a strategic asset-allocation tries to answer which type of investment is more appropriate during different cycles. By using a rebalance process, we can harvest gains while adding to deflated investments in the portfolio.
In some investment platforms such as a typical 401K, you have a menu of investment options and make choices within that construct. Usually, you have a broad list of choices in different categories. However, if you aren’t aware of the current economic cycle, you may find yourself in asset classes doomed to underperformance. Not bad choices, just inappropriate for the current cycle.
Tactical investing works to place you in the strongest trending asset classes while either avoiding or minimizing the underperforming groups. We prefer algorithmic strategies to give an unemotional approach thereby reducing the bias of fear or greed.
To improve the probability of success and remain invested, determine the most appropriate path “now” and reduce or avoid places where money is flowing out. Over time, this is one of the primary determinants of overall portfolio performance. Think of it as dialing up or dialing back and following the upward trending choice.
Sequence of Returns
In investing, we call this sequence of returns. Its impact is to reduce volatility in portfolios while achieving a more consistent return. The more consistently your portfolio generates returns and reduces downside, the better. This is especially true if you’ve already retired.
Think of it as winning by not losing. A smart portfolio keeps you out of areas where loss is happening, and in areas that are working. In this scenario, you win more and lose less.
Assume for a moment that it’s October 2007. You have a crystal ball telling you stock markets will decline over 50% during the next 15 months. Do you reduce or liquidate your portfolio? After the 50% decline, do you have the nerve to change course and by those very asset classes that decimated so many portfolios 15 months earlier?
Fear is a bad companion in the investment world because it can keep you from making the right decision. Hope is another bad friend in investing because it often stops you from removing something from your portfolio.
In short, don’t rely on baseball investment strategies to make decisions about your portfolio. Work to remove emotions and make decisions based on solid information. By replacing hope and fear with math, you increase the probability of positive outcomes.