Market insights and analysis

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

1st Quarter | 2022

Market insights and analysis


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

By David Wismer

As I was writing this article on Monday morning (August 2), the Dow Jones Industrial Average put in an all-time intraday high, and the other major indexes were not that far from their own all-time highs. Of note, the S&P 500 was close to doubling the closing daily pandemic lows of March 2020 (2,237.4)—a remarkable performance.

While reporting on today’s market activity, the radio show “Bloomberg Surveillance” made note of some of the market’s milestones, while also asking the question, “Is there too much complacency among investors?”

And Barron’s lead column, “Up and Down Wall Street,” posted the headline this past weekend, “The Stock Market Is Entering the Most Dangerous Stretch of the Year.” The article pointed out the heightened volatility that often accompanies August, September, and October, and the fact that these months “according to data going back to 1928 … constitute the only three-month period that averages in the red.”

That said, the steep sell-off markets experienced two weeks ago, when the S&P 500 plunged about 2.5%, seems a distant memory in light of the swift market recovery. The themes of ultra-low interest rates, an accommodative Fed, impressive earnings growth, and continued economic recovery fuel the bullish case for markets.

However, as always, there are plenty of potential headwinds for investors that could be cause for concern. The major wild card right now is the state of the pandemic here in the U.S. and abroad, which is receiving nonstop coverage on all major media outlets.

Guggenheim’s global chief investment officer posted an article on July 30 that was quite comprehensive in reviewing potential risks emanating from the spread of the delta variant. While acknowledging that his might be a minority viewpoint, his overall conclusion was the following:

“I could be wrong about the outcome, but if people start to move beyond cognitive dissonance and transition to panic or even simply risk reduction, at current extreme valuations risk assets are in trouble.

“The potential resurgence of the pandemic is happening during a seasonally weak period for risk assets. This increases the probability of downside risk. … Even if the outcome is not as severe as last year, we still can expect significant volatility in the weeks and months ahead as the market prices in a rising level of uncertainty.”

Revisiting the investment lessons of 2020

Given the concerns mentioned above, I thought it might be worthwhile to reflect on some of the investment lessons of 2020.

A couple of months ago, Flexible Plan Investments produced a digital publication that presented several articles reviewing significant trends for financial advisers and their investor clients last year, as well as an overview of how dynamic risk management performed in 2020. You can download the publication here.

Here is a brief excerpt from that publication.

When it comes to investment performance, it pays to be dynamic

For those financial advisers who had worked with their clients to build portfolios composed of dynamically risk-managed strategies to manage for risk and growth in all market environments, 2020 also presented an opportunity to reinforce the benefits of this approach.

In fact, what usually takes three to five years happened in just a few short months in 2020: a full market cycle.

This provided the perfect opportunity to show investors during a critical time the true value of a dynamic, risk-managed approach to investing: that you can protect your portfolio from big losses during a steep market decline without sacrificing growth when the market recovers.

What exactly is a “dynamic, risk-managed strategy”?

It’s an investment strategy built to respond to changes in the market environment—something buy-and-hold strategies don’t offer.

Because Flexible Plan Investments’ (FPI’s) strategies are designed to be dynamic, they were able to manage the risk that came with 2020’s black swan event, and even seize opportunities for growth, which are present in every market if your portfolio has the tools to take advantage of them.

When the market began to recover, FPI’s strategies were well-positioned to ride the market back up.

The result of this approach tends to be a much smoother investment ride that seeks to avoid the extreme volatility we saw in 2020.

How did FPI do in 2020?

It is gratifying to see risk-management concepts come to life, in real time. 2020 presented such an opportunity for the financial advisers and investors who work with Flexible Plan Investments.

From January 1 through March 24, 2020, encompassing the worst of the pandemic-related market downturn, 99% of FPI strategies outperformed the S&P 500. Notably, drawdown levels for all assets under management by FPI were significantly less than those for the SPX or a typical balanced portfolio.

However, financial advisers and their clients do not only want to mitigate drawdowns for their investment portfolios. They also want to employ risk-managed strategies that can take advantage of upside opportunity when financial markets rebound off of lows.

How quickly did their strategies return to a fully invested position after the fall? And, how much of the year-end gains did they manage to earn?

FPI’s dynamic, risk-managed Quantified Fee Credit (QFC) strategies, introduced in 2018, cover a range of various asset classes and suitability profiles, from conservative to aggressive. Their average returns during the 3/24/20–12/31/20 bull market recovery compared very favorably to the three major equity indexes. For example, among FPI’s QFC tactical equity strategies, returns during 2020’s bull market ranged from a more conservative QFC strategy’s 26.8% gain to a more aggressive QFC strategy’s 85.5% return. (For more in-depth 2020 strategy performance detail, see Jerry Wagner’s article “Why 2020 is a rare chance to judge your active manager’s performance.”)


The bottom line?

The many possible strategy combinations FPI offers in dynamic, risk-managed portfolios reduced the risk on the downside during 2020’s bear market.

They also, on average, achieved a substantial part of the bull market period’s gains, delivering competitive returns for the whole year while providing a smoother investment journey. When looking only at individual tactical strategies, the performance results were even more striking, on both an absolute and risk-adjusted basis.

With the renewed uncertainty of 2021, I believe the lessons of 2020 have great value as advisers and their clients navigate the remainder of the year. Let us all hope that the worst-case scenarios for the health of individuals and families in our communities—as well as for investors—are not realized.

Please download the digital publication to see details on the performance for FPI’s QFC turnkey strategies in 2020 or, if you are a financial adviser, you can also watch the webinar “Dynamic risk management at work during 2020.”

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