Successful investing in the future will look different. During the current bull market (a period over the last 10 years where stock prices have risen consistently), passive investment strategies have reigned supreme. A buy and hold strategy allowed an investor to ride the market up. All without having to do a lot of critical evaluation or trading.
Active Investment Strategy
However, the past is unlikely to repeat itself in the near term, for three important reasons:
1. Global interest rates are rising after a 30+ year decline. Interest rates peaked in 1982 and appear to have bottomed out in 2017. This means investors are more likely to lose money in bonds going forward. Moreover, bonds may not be counted on to offset stock market losses during periods of increased volatility.
2. Years of trending toward globalization appear to be reversing. Britain’s exit of the European Union and America’s increasing isolationism and tightening tariff policies will likely leave emerging markets less reliable as sources of cheap labor. As a result, this could lead to increasing consumer prices and cost of goods sold for U.S. businesses. This would push the value of large segments of the U.S. economy down, bringing volatility and decreasing returns with it.
3. European elections, Brexit and America First policies also signal that people want change and politicians are responding. People want higher wages and greater equality. Some politicians approach these desires via tariffs, infrastructure spending, and nationalism. While others focus on increased minimum wages, socialized medicine, and free education. By borrowing or taxing money from the private sector to fund these initiatives, politicians could harm growth elsewhere.
Despite these very real changes happening in our global and domestic markets, investing as a profession has never been more backward looking. Most portfolios look the same as they have over the last ten years. They may not be positioned to work well in our quickly evolving environment.
What past habits might be ill-suited for the investor facing today’s market conditions?
- Listening too much to appointed “experts” on media outlets and social influencers. These outlets value high viewership and clicks, not necessarily meaningful insights. Their commentators are “never wrong” about the cause of market movements and its future direction. Skepticism is warranted.
- Being 100% devoted to passive investing or other simplified market-perceived “truths”, like inflation will never return. If pursuing a specific strategy or investment theme was a sure winner, then we could all retire without worries. Investing is going to be more complex in the years to come, not less. As a result, investing will require critical thinking and experienced trading. Being flexible and contemplating the “unknown unknowns” will be very important.
- Depending on Central Banks or Wall Street analysts to protect us. Flooding the market with cheap money and favorable stock reports boosted stock and bond prices over the last ten years. Which was their intent. As a result, investors assumed that central banks would never let the market decline. In the case of the U.S. Federal Reserve System, the US central bank, they are now signaling that they are more focused on raising interest rates. Their goal is to fight potential inflation.
- Believing that the past will be just like the future. In the past, bonds could be reliably assumed to protect portfolios when stock market returns were negative. At the end of a 30-year bull market in bonds, they are much less likely to defend client portfolios.
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What is more likely to work going forward?
At CIG, we believe that employing an Active Portfolio Management process with discipline and flexibility will more likely provide investment results that are consistent with the required returns defined in a client’s lifetime wealth-planning process.
Specifically, our strategy encompasses:
- A core portfolio which focuses on stock and bond characteristics that are a persistent source of investment return (like cheapness) and appropriate for where we are in the market cycle.
- Meaningful diversification. After the bull market in the United States during the last ten years, the prudent approach for client portfolios is to have some investments in different geographies.
- Exposure to alternative asset classes on a select basis. These alternative investments, like trend-following strategies, are designed to likely help client portfolios under specific scenarios and circumstances.
- An understanding of market psychology. We have a plan for client portfolios and are ready to execute it without hesitation despite the usual noise. However, when real trouble develops in the markets, we will get defensive.
Next Steps to an Active Investment Strategy
As investors consider the variety of approaches offered to them, CIG differentiates itself by providing a strategic, integrated and forward-looking investment program designed to preserve and grow client assets. It’s easy to stick with strategies that have worked in recent times, like passive investing. CIG believes that Active Portfolio Management, with discipline and flexibility, gives clients the best chance to weather the changing times ahead.
The professionals at CIG Capital Advisors can help you assess customized opportunities and implement an active investment strategy. Email Brian Lasher to schedule a complimentary consultation with a CIG Capital Advisors professional.