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 David Wismer

The one constant of football at all levels is that things are always changing. But the fundamental principles and lessons of the game have endured for decades.

Like many of you, I look forward to another season of pro football, which kicked off this past week.

As always, the NFL has seen many new developments heading into the new season this year. Here are a few of the major ones:

• While it offers little solace to last year’s Buffalo Bills team, playoff rules have been changed to guarantee each team a possession in overtime before the start of “sudden death.”

• Several shake-ups are occurring in the national broadcast booths. The big news is that Fox’s long-term broadcasting team (Buck/Aikman) is moving to ESPN. According to Sporting News, CBS is the only network keeping its current “A” team, which consists of Jim Nantz, Tony Romo, and Tracy Wolfson.

• Amazon Prime Video is taking over “Thursday Night Football.” (This development may frustrate many fans, but it is likely a smart, if expensive, marketing move for the retailer.)

• Ten NFL teams have new head coaches, tying a record for the most in one season.

• Topping quarterback news, says Sports Illustrated, is “Tom Brady unretiring, plus the trades of Russell Wilson, Matt Ryan and Baker Mayfield, and the extensions of Aaron Rodgers and Kyler Murray.” There was also the noteworthy and much-debated signing and blockbuster contract of Deshaun Watson with the Cleveland Browns. 

As for college football, I used to be a huge fan—but not so much anymore. The breakdown of several traditional league structures, the continued dominance of two leagues (the SEC and ACC) in the playoffs, a limited national championship format (which will change), soaring coaching salaries, and the lack of clarity around the new college player compensation/endorsement rules (names, images, and likenesses) have all been something of a turnoff for me.

 “Defense wins football games”—and other investment analogies

In interviewing financial advisers for Proactive Advisor Magazine, many of whom are strong advocates of an active, risk-managed approach for their clients’ portfolios, I have heard more than once, “Winning football starts with a strong defense, as does investing.”

One of the authors for our publication took the football analogy a bit further for an article a few years ago called “Agility drills for client investment portfolios.”

I got a big kick out of the article and enjoyed swapping personal stories with the author, Mike Posey of Theta Research, who played high school football in Texas. Mike likens some aspects of football to several elements of sophisticated active investment management, citing some of the principles he believes are important to financial advisers and their clients, paraphrased here:

  1. Diversify. Just as it wouldn’t make much sense to field a team with players that all have the same skill sets or who all play the same position, an agile investment portfolio should also be diversified to include noncorrelated strategies, each with different strengths in the portfolio. Whether you call these strategies active, tactical, or alternative, they are characterized by rules-based approaches that seek to follow market trends rather than being victimized by them.
  2. Know the playbook. In an investment portfolio, it’s important for advisers to communicate why each investment strategy is included and what it is intended to do. In football, sometimes an aggressive passing style is called for on offense; at other times, a tightly controlled and conservative game plan is needed. Similarly, it’s equally important to make sure that multiple investment strategies are represented in clients’ allocations and not just multiple asset classes. To be effective, the overall plan for a portfolio should be like a playbook, with different strategies designed to perform during a variety of market conditions across long time frames.
  3. Watch the films. Saturday morning after Friday’s high school games is always dedicated to watching the game films. Reviewing the films is akin to advisers monitoring their clients’ portfolios regularly. This is not to say that anyone—client or adviser—should be overly concerned with scrutinizing performance every day or every week. Instead, advisers should review their clients’ portfolios as frequently as quarterly and no less than annually. Such a review can help to determine whether the portfolio’s constituents are performing as expected and whether the risk level is appropriate. (Using Flexible Plan Investments’ business analyzer tool, exclusive to FPI, advisers—and, through them, their clients—can view the suitability, durability, diversification, and multiple benchmarks customized for each client’s actual portfolio. It is especially helpful for monthly, quarterly, or annual reviews of an adviser’s entire book of business. Advisers can access the tool on the adviser dashboard of flexibleplan.com after login.)
  4. Keep fantasy football in its place. A final point in this analogy is to be wary of the investment equivalent of fantasy football. Backtesting can be a valid and productive analytical tool when used properly, and a dangerous tool when used improperly. Investment advisers must resume their coaching role and make sure that not only are trading strategies evaluated properly but also the methodology of producing backtests.

Mike summarized,

“Failure to include agile investment strategies can be costly. In football, the lack of agility can result in an opposing team’s score, or your own team’s fumble or tackle for a loss. For an investment portfolio, the lack of ability to adapt to market conditions can result in huge losses. …

“After 30-plus years in the investment industry, and having lived through markets of all types, I have come to some firm convictions. By including actively managed strategies in your clients’ portfolios, they will have a better chance, I believe, of being on the winning team and reaching their investment goals.”

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If you are a fan, I hope you enjoy this year’s football season, whether you root for a high school, college, or professional team.

And despite the stock market’s current volatility, let’s pull for the “Super Bowl Indicator” to ultimately work its magic. The Super Bowl victory of the L.A. Rams last February calls for the higher probability of an overall up market year, according to the indicator—a tongue-in-cheek prognostication that nonetheless has had a success rate close to 80% since 1967!



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