By Jerry Wagner In medicine, as in sports, much of the excitement is generated by the knockout punch—the quick, single action that is going to end both a fight and an illness. But just as we often saw in the Olympics, and as we are increasingly finding in medicine, the practical solution comes in the combination, the one-two punches, that score the most points and earn a victory. The first pandemic in my lifetime was the spread of HIV/AIDS that ushered in the 1980s. Since then, it is estimated that over 36 million people have died worldwide from the infection. Even today, 37 million people are estimated to have contracted it and over 680,000 died from it in 2020 alone. Still, while this scourge has not yet been cured, the means to control it has been developed. Highly active antiretroviral therapy (HAART) was developed in the mid-1990s. As the chart discloses, deaths from AIDS decreased significantly once HAART appeared here in the U.S. Before that time, most antiviral treatments had failed to stem the disease. It would mutate very quickly and even treatments that were effective at first soon lost their usefulness. In about 1995, scientists developed a new way of dealing with the disease. Instead of a single treatment, they hit the virus with a triple-dose cocktail that combined three different medications from at least two types or classes of antiretroviral agents. This combination of punches has not proven to be a knockout, but it has knocked the virus back on its heels. “HAART and appropriate prevention of opportunistic infections reduces the death rate by 80%, and raises the life expectancy for a newly diagnosed young adult to 20–50 years .” In the field of mental health, it has been a similar story. Single treatments have proven less effective. While mixing drug cocktails involves almost as much art as it does science, combinations of drugs are now commonly being used to treat bipolar disorder and schizophrenia . “The basic idea is to attack the mental illness on multiple fronts using different drugs with different actions.” It makes sense. Sufferers of bipolar disorder have to endure periods of both depression and periods of great energy. It’s reasonable to think that different drugs are necessary to deal with each disposition, and due to the quickly changing moods, using these in combination should be especially effective. Today, we see science turning to combinations of monoclonal antibodies to deal with not only the COVID virus but also its principal variants. Regeneron, used to treat President Trump, is an antibody cocktail made up of two different monoclonal antibodies, casirivimab and imdevimab. A recent study found that “… combinations of two antibodies often retained potency against variants even when one of the two antibodies lost some or all ability to neutralize the variant in lab studies.” One of the authors wrote, “Resistance arose with some of the monotherapies, but never with combination therapy.” If you test positive for COVID and you are in one of the high-risk categories, ask your doctor if Regeneron is appropriate. While these three examples are illustrative, they are not isolated examples of how the world is turning to applying combinations of drug therapies to treat illnesses once only attacked by single-therapy approaches. Whether we are looking at broad areas of research, such as cancer and heart-attack prevention, or niche diseases, such as cystic fibrosis, combinations of drug strategies are coming repeatedly to the forefront. In finance, combinations of asset classes known as diversification were all the rage back in the 1950s and ’60s. In the years since, the financial-services industry has clung to that approach as if it is the only area where combination therapies could be effective against the persistent disease of market volatility. Yet for more than two decades, our research, and now that of others, has demonstrated that financial professionals can lift their game to a new level by employing combinations in a new and potentially more effective manner. By combining strategies, it is possible to further combat market and, hence, portfolio volatility, while in some cases also preserving most of the return of the best-performing strategies. Reduction in portfolio volatility We know that, at a very basic level, merely combining investment strategies works to lower overall market volatility in the same way that combining asset classes does. If we simply equally weight (hold the same percentage of each) strategies or asset classes, we will generate lower volatility for the portfolio than we would have expected by simply averaging the volatility of each asset class or strategy. This benefit has been called the greatest free lunch on Wall Street. But while this seems obvious when applied to asset-class diversification, it has been slow to catch on when applied to strategy diversification. Most investors and financial professionals today still cling to a single-strategy approach to their portfolio construction. They diversify simply among asset classes, seeking to buy and hold a magic percentage of each asset class and rebalance back to that ideal percentage each quarter. There’s nothing wrong with this, but it is a single strategy. There is no attempt to provide investors with another level of risk protection—diversification of strategies. They are simply letting that fall by the wayside. In other words, they skip their invitation to an extra free lunch. But there is another benefit that diversification of strategies brings that is unattainable with simple asset-class diversification. Conventional market research has always taught that added return must come with added risk. In other words, if an investor seeks higher returns, they must also accept a higher potential for losses. The consequence of this with a simple diversification-of-assets strategy is that while practitioners secure the bonus risk reduction from the diversification, they can only achieve average returns. And if you adjust the weight of the various assets to favor a desired asset class, the risk and return will be adjusted proportionately. There will be no benefit when the return is adjusted for the added risk. You cannot escape the math. Yet as financial academia began to explore some of the strategies that we and others were pursuing, they discovered disconnects from this conventional way of looking at the subject. This was true at least when the standard was a comparison to the traditional benchmarks still largely in use today, such as index investing with the S&P or a 60/40 portfolio. Discoveries in the realms of factor analysis and smart beta cut large holes into the theoretical efficient-market umbrella academia had spread over the portfolio-management industry. Large groupings of assets, such as value and low-volatility portfolios, confounded the conventional math—higher return could be attained with less risk. And strategies employed, such as momentum strategies and global tactical strategies, could do the same. Alpha (the obtaining of more return for less risk) was born and has become respected as an achievable reality. Drawbacks to using combinations In an article that is favorable toward the use of combination drugs to combat mental illness, the author, after discussing the upside, covered the drawbacks to their use: That’s the upside. It can offer mental illness patients tremendous benefits when doctors have a careful, rational plan for trying multiple drugs. But there’s a downside, too, says Andrew C. Furman, MD, director of clinical services for psychiatry at Atlanta’s Grady Memorial Hospital and associate professor of psychiatry at Emory University. “Unfortunately, in the majority of cases doctors are just throwing everything they possibly can at a mental illness in hopes that something will get better,” says Furman. That happens too often, agrees Alan J. Gelenberg, MD, head of psychiatry at the University of Arizona and editor-in-chief of the Journal of Clinical Psychiatry. “What often happens in busy practices, both private and public, is that medications are thrown on without adequate information,” according to Gelenberg. “Patients can end up with regimens that include multiple drugs without a rationale for using them all. It is not uncommon to look at a medical chart and say, ‘I can't figure out why a patient is on this combination regimen.’” That can be bad news for mental illness patients, says Beth Murphy, MD, PhD, a psychiatric drug researcher at McLean Hospital in Belmont, Mass., and instructor in clinical psychiatry at Harvard University. “The bad news is it costs more. And the more medicines you take, the more likely it is you will have an adverse response,” says Murphy. “Moreover, it increases the chance your medicines will [harmfully] interact with one another.” At Flexible Plan Investments, we offer over 150 different risk profiles and dynamic, risk-managed strategies. Unfortunately, we have seen each of the drawbacks of using combinations of drugs described above play out with combinations of investment strategies as well. Often, portfolios of strategies are created simply by putting together strategies that are performing best at the time of their creation. Little thought may have been given to how these strategies interact, or how they will respond to a different market environment from the present one. Furthermore, the doctors trying to cure mental illness with combinations of drugs have to monitor their use and adjust the choice and dosage of the combinations created. In the same way, advisers and investors responsible for creating portfolios of strategies have to monitor the strategy combinations and make adjustments over time as conditions change. These drawbacks require study to overcome. And the monitoring and adjustments take time away from other duties of practitioners and investors alike. For that reason, Flexible Plan has created several turnkey strategies. We call them turnkey strategies because our clients invest in them and we do the rest. These are designed expressly to address the drawbacks that can occur with using combinations of strategies. For our turnkey strategies, we choose the strategies that best work together for the present conditions. We also seek to create durable strategy combinations that can deal with an uncertain future. In addition, we monitor the combinations on a regular, prescribed basis and make changes to the portfolio automatically as dictated by the allocation strategy adopted for each turnkey strategy. We offer turnkey strategies that can stand alone or be paired with traditional, passive core strategies (our QFC Multi-Strategy Core). They also can supply the explore portion of a portfolio (our QFC Multi-Strategy Explore solutions) to supplement either a traditional portfolio or our QFC Multi-Strategy Core. And finally, our QFC Fusion 2.0 strategy delivers suitability-based core and explore strategies. All of these options are exclusively, dynamically risk managed. And FPI waives the collection of its fee on them on accounts over $100,000. Our research 1 shows that these multi-strategy combinations can deliver both of the “free lunches” discussed above. Our QFC Multi-Strategy Core Growth strategy lowers risk 7.3% from the already low average risk level of the six core strategies available to it, while increasing after-fee return 8.1% over the average and risk-adjusted return 19.1%! Our popular QFC Multi-Strategy Explore: Equity Trends combination strategy 1 lowered risk 5.5% from the average already-below-market-risk level of the four explore strategies that can be utilized, while raising risk-adjusted return 14.9%. Best of all, in our research, the dynamic allocation to the strategies generated a return equal to the best-performing strategy of the four that could be drawn upon! * * * In baseball, like boxing, everyone loves to see the knockout punch or the last-inning walk-off home run that wins the game. But after years of watching baseball, one lesson I have learned is that combinations of hits tend to win more ballgames than home runs. And in investing, I feel much more comfortable having multiple dynamic, risk-managed strategies working for me every day than depending on a single-strategy, passive, buy-and-hold approach. 1 Results are based on hypothetical research (after maximum annual advisory fees of 2.25%, which are further reduced by applicable fund credits).