Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

2nd Quarter | 2022

Market insights and analysis

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Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

By Jerry Wagner

The Beatles sang of it in their first American hit. And nearly 60 years later, on May 3, Lady Gaga released a new single with the same subject matter for the movie “Top Gun: Maverick.”

Hand-holding. We learned to do it innocently as children. Then as teens, it took on a different meaning. Throughout adulthood and into senior life, it still remains meaningful.

Holding another’s hand can provide assurance, assistance, and comfort. Says Toni Coleman, LCSW, a psychotherapist and relationship coach in the Washington, D.C., area, “Research shows that touch, like holding hands, releases oxytocin, a neurotransmitter that gives you that feel-good buzz.”

Barron’s presaged my comments in a story back in January, saying, “With markets plunging in recent sessions and volatility spiking, many financial advisors may find themselves in hand-holding mode as clients fret about their portfolios and the potential for further downdrafts.”

The markets of late have certainly provided ample reasons to need a strong dose of oxytocin. After five straight weeks of stock market declines and the worst start of the year in terms of bond market performance ever, many investors can definitely use “that feel-good buzz” that a talk with their trusted financial adviser can give them during such times.

I strongly advise doing so.

How advisers “hold your hand” through tough times

If you surf around the web and review many advisers’ websites, however, you’ll often see one prominent value proposition: “We’ll help you manage your investment behavior.”

For most advisory services using such a value proposition, they really mean that “We’ll hold your hand when the bear market comes.” Their primary purpose is to support a “buy-and-hope” mode of investing by working to keep you invested and to avoid the common investor mistake of selling out at or near market bottoms.

In analyzing this type of hand-holding, a recent article tells us that there are at least seven different ways we can hold each other’s hands. I think numbers four (the firm but non-interlaced grip) and six (one hand gently resting on top) may be applicable here.

In hand-holding technique number four, the article says, “(t)he hand-holder may be tightening their grip in a protective way to offer comfort or reassurance if the other is anxious. ...”

I think this is the primary grip used in adviser-investor hand-holding. The adviser is trying to comfort the investor and assure them that they are doing the right thing in waiting out a market decline.

However, if the decline lasts long enough, the hand-holding may change character. With hand-holding technique number six, the article says it doesn’t necessarily mean that you are “doomed,” but you do need to pay attention: “When you put your hand on top of someone else’s and let it rest for a minute while you speak, it may mean that you’re delivering bad news.”

Can we alleviate the need for investor hand-holding?

The significant declines (the 50% to 75% variety) experienced not once, but twice, in the first decade of this century meant different things to different investors. Some were young and had time to start over again. Others were older and saw their dreams of an early retirement substantially delayed or abandoned. Some retired investors were forced to return to the workforce or materially reduce their standard of living.

When I started Flexible Plan Investments (FPI) in 1981, I did so with the belief that I could create a different type of asset-management service. My market timing would be so accurate that it would alleviate the need for investor hand-holding.

In the ensuing 40-plus years that we have been in business, I learned that no market-timing approach is so consistently precise in its timing that counseling isn’t still needed. As I moved into using trend-following strategies, in search of wealth-preservation methods for different asset classes, I had to settle for trades “close to” bottoms and tops instead of being precisely at them.

Since trend following works in most but not all market environments, I sought other types of strategies. Finally, I realized that only by using multiple types of strategies in a single portfolio could I get close to my goal.

But, alas, perfection is elusive, or more accurately, impossible.

I have to admit to failure. I have not been able to eliminate the need for anxious clients to seek counsel and, yes, hand-holding. Hopefully, our approach has reduced the need.

The value of dynamic risk management in volatile times

When global politics, inflation, economic downturns, bad policies, and Federal Reserve tightening cause markets to become as volatile as they are today, it’s not surprising that investors look for hand-holding. Even financial advisers that work with us need to spend some hand-holding time with their clients. Part of that time is used to explain the value of an asset manager, like Flexible Plan Investments, that employs dynamic risk management.

First, and most importantly, investors use us so that they don’t have to make their own investment decisions. They don’t have to try to understand the conflicting messages of the markets. They don’t have to worry about being right or wrong. We take all the actions for them.

At present, we have done just what we were employed to do. The stock market continues to fall, inflation soars, bonds exhibit volatility as significant as stocks, and even the ultimate alternative—cyber coins—are crashing, yet we have our investors in the defensive position appropriate for each strategy.

Our tactical (timing) strategies are all defensively positioned, mostly in money markets, short-term bonds, gold, or inverse funds. Equity strategies that are not tactical have been moved to value and other defensive assets.

Still, on any given day, we can appear out of position. We’ve had so many days when the market is up 1% to 3%, only to be followed by negative returns of equal magnitude the next day. Many conflicting news stories are being digested by financial markets day by day and even hour by hour. And there is always a random element caused by the emotion that is a big part of human behavior.

I’ve explained in past articles the difference between baby bear markets and the grizzly bear varieties. The former are short and shallow declines of up to 25%, while the latter are long and drawn out with losses in the range of 50% to 75%. Suitability profiles and asset-class diversification can usually handle the baby bears. On the other hand, the grizzly bears require multiple dynamic strategies employing tactical decision-making.

Believe it or not—despite all the bad news and market volatility—we still are in the baby bear stage.

As I discussed earlier this year—strategies, like markets, go through transition periods. Periods as volatile and hostile as those of late hold the potential for the current baby bear to turn into a grizzly bear fairly quickly. Or the markets could settle down. We could work our way out of the present baby bear market. How do we know how we are doing when we are in such a phase?

It can be difficult because trend-following and tactical strategies can do a bit worse than the market indexes in a baby bear market. It can take a movement into grizzly bear territory to justify their approach.

As I have pointed out previously, 2020 was a near-perfect market environment for experiencing how this works.

As the chart below shows, the 2020 bear market had two significant downturns: the baby bear phase and the grizzly bear phase.

As is evident, the first phase was a transition period. Being in a baby bear period, the strategies fared about as badly as the indexes. But in the grizzly bear phase, the strategies did much better than the indexes.

The same seems to be happening this time around. Although we have had two distinct down legs in 2022, the overall decline does not yet qualify as anything more than a baby bear market. Yet, the following chart shows that the strategies are doing even better than the indexes in 2022. And in the two present bear market plunges, the strategies are once again doing better in what may turn out to be the grizzly bear decline than they did in the earlier baby bear phase.

Strategies take time to transition, but they do adjust.

How we can help make hand-holding conversations more valuable

Your financial adviser can review all of this with you using the many tools we offer to help them help you evaluate our services.

The OnTarget Benchmark Monitor (available after you log in to your account on the OnTarget Investing website, ontargetinvesting.com) is one of those tools. It will show you how you are doing against third-party Lipper benchmarks derived from actual mutual fund performance. The benchmarks are customized for you in the same proportional percentage as the strategies in your portfolio.

Despite the early warning from Barron’s that advisers will hold their clients’ hands when they want to discuss the current market volatility and its effects on your portfolio, many advisers won’t have to resort to that for most clients. Still, a visit with your adviser will likely generate the comfort and assurances you need to weather the current financial market storms. As always, we here at Flexible Plan Investments are here to help both of you achieve that goal.

“We want to hold your haaaand. We want to hold your hand.”



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