Market insights and analysis

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

2nd Quarter | 2022

Market insights and analysis


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

By Jerry Wagner

It is one of the great modern mysteries of investing. 

Investment industry giants, and most advisers, tell their clients to hold on during market downturns. Classes and webinars teaching advisers the art of handholding pop up everywhere during these crisis periods. Clients are cautioned against selling as the value of their accounts plummets to a chorus of “Don’t be a market timer! Buy and hold is the only way to go.” 

Then someone throws a switch: “The market may be changing direction.” “Buy signals are flashing.” “We may have hit a bottom in this downturn.” “Increase your equity participation.” “Buy stocks now!” 

And here’s where the plot thickens, as they say in mystery novels. We’re supposed to buy stocks now, according to these industry giants. But the mystery question is, “With what?”

This advice is coming from the same gurus and industry behemoths that said to hold on. They are the identical market experts who told us to not retreat to cash but hold our equities as they fell, day after day. 

Now they say to buy.

But as the title of this article points out, “You can’t buy if you don’t have the cash.”

Where’s the money supposed to come from if you followed the advice of these market geniuses and did not sell early on in the downturn?

What keeps clients from investing new money?

One dirty little secret in the industry is that advisers always believe that their clients have more money than they are investing with them. And to a significant extent, that is probably true. But …

● Each client knows how much of their money they are comfortable investing. Many have suffered through multiple 50%-plus declines in their investing lifetime. They have learned to keep cash safe rather than exposed to such losses. They believe they need that money as a safety net so they can sleep at night.

● Investing other people’s money is based on trust, and trust is not unlimited. Everyone hedges their bets. Clients use multiple advisers to diversify their investments, just as the adviser seeks to diversify the assets held in their portfolio.

● When clients experience large losses and little proactive management is taking place within their accounts, they likely have little interest in investing more. Instead, they are more likely looking to transfer the money to a new adviser.

The result of all these mental machinations is that at the point in time that the market is still falling, or when a rally is barely beginning, clients will not invest new dollars. At the critical point when buy signals are being proclaimed, at the very instant when they should be putting new dollars to work, they often can’t or won’t take advantage of these signals.

I think it is more likely that they can’t take advantage of these signals. Because most clients follow their adviser’s advice and buy and hold through a bear market, they do not have the cash to invest anew in equities, even if the timing is perfect on the bullish market call. 

In other words, advisers are, as Shakespeare said in Hamlet, “hoisted with their own petard” or, in the modern vernacular, removed by their own self-made bomb. These advisers advised their clients to hold on for the decline, then the clients lost money, and now the same advisers say, “Invest in stocks once again.” It is quite natural for the clients to ask in return, “With what?”

What a difference dynamic risk management can make

If an adviser, a client, or a prospective client is working with an asset manager that practices dynamic risk management, the results can be very different.

A dynamic risk manager takes on the responsibility of allocating the client’s portfolio to its best advantage. Yes, that includes pursuing opportunities when they present themselves, but it also means working to reduce exposure when times are rough. The result of this quantitatively-driven reallocation can be lower losses and more cash to invest when those new opportunities appear.

When the market was falling this year, many clients and advisers asked me, “Should I change my growth strategy to a more conservative model?” Invariably, when we examined the portfolio we found that the growth portfolio was already positioned in the same defensive manner as the more conservative strategy. Why change strategies? Flexible Plan Investments (FPI) had already done the job of lightening up the portfolio’s equity exposure. 

A note on “defensive positions”

People often wonder what I mean when I say that we take “defensive positions.” What’s a defensive position? It used to be that it was always a money-market fund, because they do not normally decline in value. However, in recent years, with low or nonexistent money-market rates, we expanded the assets available to our portfolios to use for defensive positions. 

For many years now, our defensive positions have included money markets, bonds, gold, and alternative asset classes. In our QFC strategies that usually means the Quantified Managed Income Fund (QBDSX), the Gold Bullion Strategy Fund (QGLDX), and the Quantified Alternative Investment Fund (QALTX). 

How did these defensive positions handle the turbulent decline in 2022’s first half? Our primary QFC defensive position, QBDSX, gained 0.6% between year-end 2021 and August 12, 2022. QGLDX lost 4.6%, and QALTX lost 2.8%. The S&P 500 ETF (SPY) fell 10.8% for the same period.

As the market cycle continues, a similar story unfolds: During the early stages of a market rally, like now, that same growth investor does not have to try to “market time” his or her investment. The investor does not have to find the cash to invest in the new run higher. Once again, FPI is doing the work for the adviser and their investor clients. The defensive positions established on the move lower provide the fuel to fund new investments in the portfolio’s expanding equity allocation as prices advance.

Dynamic risk management at work

Let’s see how our dynamic risk management works with our intermediate-term tactical strategies. The QFC Classic, QFC Self-adjusting Trend Following, and QFC Market Leaders strategies were all in their maximum defensive positions on June 30, 2022. Over the next month and a half, each generated a buy signal on equities. QFC Self-adjusting Trend Following led off with a move to 100% NASDAQ on July 21, and QFC Classic followed with a buy on July 26. QFC Market Leaders moved to its maximum leveraged equity position due to its Market Environment Indicator (MEI) on August 8.

How has the market reacted after these buy signals in the past? Three charts tell the story:

As one can observe from the charts above, each of these is a very powerful buy signal on the equity market. As the returns over the one-month period following each signal demonstrate, not all of these signals are immediately profitable all of the time. But the likelihood of their being profitable over the next three to 12 months increases significantly, and the returns are above average for the stock market in the time period highlighted. (All three of these strategies are combined in our QFC Multi-Strategy Explore: Equity Trends strategy.)

Is now a good time to add dollars to your FPI account? 

If you’ve been thinking about opening an FPI account or moving money from a passively managed advisory account to FPI, is now the time?

Obviously, the historical performance of the buy signals presented above suggests that now is a very opportune time to invest in stocks.

But more importantly, doesn’t it make sense to employ a dynamic risk manager for your investments all of the time? 

As we outlined above, a dynamic risk manager can move you from an equity position to a defensive position in rough times, and move you back into stocks when the smoke has cleared. This means you won’t have to answer the question, “With what?” when it’s time to buy. The dynamic risk manager should already have the liquid assets on hand when the time comes to buy equities.

It also means that the answer to the question, “When is it time to open a new account, or to transfer an existing account from a passive manager to a dynamic risk manager?” is easy: It’s always time! Because whenever you make your move, the dynamic risk manager will position the account appropriately with the market environment and do all the future allocations for you. 

Why wait?

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