Market insights and analysis

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

3rd Quarter | 2021

Market insights and analysis

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

Businesses around the world have seen their sales dry up as people have restricted their movement in the wake of the pandemic. There has been much talk about how Amazon and other online retailers have bucked the trend. Another segment of the retail marketplace has also been thriving despite the virus fears.

Do-it-yourself (DIY) purchases in the areas of home improvement, crafts, and even puzzles have been soaring. According to a CNBC article from April, “Gamemaker Ravensburger has seen U.S. puzzle sales soar 370% year over year in the past two weeks, according to the company’s North America CEO Filip Francke.” Home improvement giants Lowes and Home Depot actually showed year-over-year improvements in sales in a recent report.

DIY projects are trending for many reasons: (1) We have more free time as we stay at home to decrease the chance of infection; (2) Stimulus checks offered more available funds; (3) DIY projects provide a sense of purpose and completion that a job well done can deliver; (4) DIY projects can help reduce stress and anxiety, especially during periods of isolation.

A rise in DIY investing

DIY investing has also surged throughout the pandemic. A survey of online brokerage operations showed new account openings up 50%–300% in the first quarter. Robinhood, the darling of the younger generation, saw new users grow by 3 million, bringing total users to over 13 million, during the first four months of the year.

Despite having the time and resources to invest during the pandemic, most of these new DIY investors would be wise to remember that there are costs to trying to do it yourself.

Since 1984, analysts at independent investment research firm DALBAR Inc. have been publishing their annual “Quantitative Analysis of Investor Behavior” report (QAIB). Since that time, the report has shown that investors managing their own accounts consistently underperform the mutual funds in which they invest. This year’s report was no different. While the S&P 500 earned a 6.02% average annual return, the average equity mutual fund investor returned just 4.25% over the 20-year period ending December 31, 2019.

In a separate report documenting investing results during the COVID-19 shutdown, DALBAR found that “The Average Fixed Income Fund Investor lost -1.49% in the first four months of 2020 … while the Bloomberg Barclays Aggregate Bond Index gained 4.98% during the same period.” And DALBAR says the average stock fund investor lost 12.5% through the end of April, while the S&P 500 Index was down just 9.2%.

While we were one of the first to create a turnkey asset management platform that allows the adviser to be the portfolio manager (DIY investing for your financial adviser), we’ve also learned that there are some common pitfalls to attempting to do it yourself:

1. Insufficient knowledge of what you are investing in. Whether you are investing in assets or strategies, you have to spend the time to learn about the investment. This sounds pretty basic, but losses of inexperienced investors in options, bitcoins, volatility vehicles, and leveraged and inverse funds are testimony to the fact that many do not research before they invest.

Hopefully, these investors have learned how important this knowledge is to be able to correctly use the investment. But it is also important because the more you know the characteristics of an asset class or strategy, the more you are able to trust it to do what it is intended to do within an investment portfolio. This trust is essential to allow investors to stick with their plans and invest for the long run.

2. No time or opportunity. Most investors cannot devote all of their time to their investments, yet the 24-hour investment and news cycle demands such attention. And, of course, the demands of everyday life further dilute the necessary time investment. They can’t do everything all of the time.

3. Emotion gets in the way. A puzzle fan wrote that his reason for doing puzzles during the pandemic was that, “Bringing order to a pile of chaos can have an incredibly calming and relaxing effect.”

Be assured, DIY investing will not have such an effect. Frustration and anxiety are the most likely result of the chaos so many investors believe is endemic in the financial markets.

Fintech entrepreneur George Mitra, in his recent insightful article “DIY Investing May Lead to an Unhealthy Portfolio During the Current Pandemic,” points out that,

“The two emotions that always compete in investment decisions are Greed and Fear. In reality, it is only one – Fear. It’s either FOMO (Fear of Missing Out) or the fear of losing something. One leads to making a decision when times are good and gives investors more confidence in their ability, their risk tolerance, and knowledge about their needs. Whereas, the other freezes us, or makes us take decisions in haste looking at short term rather than longer horizons.”

The interplay of these and other investment biases has spawned a whole new field of study: behavioral finance. We now know that the internal mechanisms of the human brain work against successful investing. Successful professional investors establish procedures and do the quantitative research necessary to overcome these emotional roadblocks to profits.

4. Lack of discipline. This can undermine the best-laid plans and overcome years of research. When I was doing weekly seminars for investors, I used to tell my attendees that I had researched thousands of investment systems. Many of these systems have long-term records of success. Based on my experience with investors, I know that I can explain a profitable system’s rules and history, but I know that, in most cases, investors will not go home and follow it.

It’s like when investors subscribe to an investment newsletter. The writer tells them when to buy and sell. Here’s what investors typically do with that information: (1) They wait to see if a recommended trade is successful in real time; (2) When they see enough successful trades, they finally start investing; (3) Once they have a losing trade or two, they stop following the signals and let the newsletter subscription expire. DIY investors tend to be easily discouraged.

Of course, investors eventually learn that, unfortunately, the best buy and sell signals seem to occur when it is hardest to pull the trigger. You probably know how the story goes: The market falls and falls, and then you get the buy signal. At this point, you may have been losing money for weeks, losses have mounted from 20% to 30% to 40%, and now you are being told to invest. It’s very hard to do. Similarly, if you get a sell signal when gains are multiplying and it seems like the best of times, will you sell?

If not DIY investing, then what?

As a TAMP (a turnkey asset management program), the answer for Flexible Plan is easy: turnkey investment management. With turnkey separate accounts, we pick the investments, allocate and reallocate them for you, and provide the dynamic risk management that we are known for.

Since I founded Flexible Plan in 1981, we have always provided turnkey separately managed accounts and nothing else. In the past, these have mostly consisted of a single strategy, often involving a single asset class.

As we developed and made available hundreds of these strategies over the years, advisers and investors asked us if, instead of just picking when to invest in an asset class, we could also pick the strategies and when to invest in them. The results were our turnkey multi-strategy offerings: QFC Multi-Strategy Core, QFC Multi-Strategy Explore, and QFC Fusion 2.0.

Because these are turnkey strategies, you don’t have any of the roadblocks that foil DIY investors:

1. Choosing investments just got less complicated. You don’t have to learn the ins and outs of Flexible Plan’s 100-plus strategies to make an informed judgment of what is right for you in the current environment—nor do you have to stay up late reviewing all of the stats on every one of them so as to have enough confidence to stay with the strategy for the long run.

This is also an incredible advantage for financial advisers. It means that they have a limited number of strategies to become familiar with, and a single, unchanging concept on which to educate clients—the advantages of multi-strategy investing.

No longer will you have to decide which strategies to buy and when to do it. And you won’t have to agonize over how much to invest in each strategy you choose.

No more strategy changes when market conditions change. No learning new strategies. No monitoring individual strategy performance. No having to learn how to tell whether a strategy has just stalled or suddenly stopped working. No dropping old strategies when they become ineffective. We do all of that for our turnkey investors and their advisers.

2. Time constraints are no more. Flexible Plan has more than 70 financial service personnel to watch over your accounts when you have pressing personal or business concerns. You can even take a vacation, and we’re there to cover for you.

3. Investor emotion is not a problem. Our quantitative strategies are all drawn from years of research, backtesting, and time-tested experience. The rules for buying, holding, and selling are all laid out in technical precision and constantly monitored for improvement. They are detailed in advance, so there is no question about what to do when the time for action presents itself.

4. Trading discipline is not a problem. Our quantitative systems leave no room for indecision. The signals are generated by our computers and go to a trading staff that is not connected with the strategy development. There are no egos involved with the people charged with executing the signals. They are only concerned with getting the trading done accurately and as soon as the computers generate a signal to buy or sell. The trading staff is judged not by the profitability of the trade but by precision and timing in each trade’s execution.

DIY investing remains susceptible to all of these pitfalls. Turnkey multi-strategy investing avoids them all.

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Fintech entrepreneur George Mitra concluded that,

“DIY investors tend to perceive risk management as avoiding losses. In reality, risk management is about taking chances while mitigating potential negative fallout with safer bets: it’s about maintaining an acceptable level of risk to enable higher returns. Part of this process is also reviewing investments. To not be swayed by personal bias, hindsight bias, or being too attached to them. This helps in identifying losers and pruning them, to make way for the new potential winners”

Robert R. Johnson, president and CEO of the American College of Financial Services, in Bryn Mawr, Pennsylvania, sums it up like this: “Basically, when people get sick, they go to a doctor. When people get in a legal tangle, they seek the advice of a lawyer. Yet, somehow, people believe they should be able to navigate the complex financial waters on their own.”

Generally, people can’t. But today, people don’t have to!

Turnkey multi-strategy investing is here, and you don’t have to do it yourself any longer.

All the best,

Jerry



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