Market insights and analysis

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

1st Quarter | 2024

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Jerry Wagner

It’s hard to believe that summer is already over. But fall has definitely arrived: Temperatures are starting to cool, kids are back in school, and the cider mill near my house is open for business.

Apples have always been a major local fruit here in Michigan—right up there with cherries, grapes, and blueberries.

Did you know that the apple core makes up about 30% of the apple? This is according to an editor at The Atlantic, who also speculates, tongue in cheek, that “if each of us eats an apple a day, as we all do, and we are all wasting 30 percent of our apples at $1.30 per pound, that's about $42 wasted per person per year—which is $13.2 billion annually, thrown in the trash or fed to pigs.”

When eating an apple, most of us don’t eat the core. It is underappreciated. Yet the core contains the seeds, and the seeds secure the survival of one of my favorite fruits.

I like to think of the core as “the central portion” of the apple. I think that better prioritizes the core. It is essential to the apple’s persistence on our tables and in our cider.

In much the same way, the core portion of our investment portfolios is often underappreciated and thought of as just a throwaway in the portfolio construction process. In reality, it is the central portion of the portfolio.

As the editors at Morningstar wrote, “The core holding concept might not be the most exciting of ideas, but what core holdings lack in thrills, they make up for in importance. A core holding is just what it sounds like: It's the central part of your portfolio. The core requires investments that will be reliable year in and year out. They're the solid foundation for the rest of a portfolio.”

Why is the core so central to an investment portfolio?

It goes back to the basics of a portfolio.

Portfolio returns are said to be made up of “beta” and “alpha.” Beta returns are those derived from simply investing in a market—in a bond index or a stock index, for example. Alpha returns are the extra juice that comes from trading, holding alternative investments, or the exercise of tactical expertise. Alpha can enhance the portfolio returns or provide a measure of risk protection.

If you are pursuing a portfolio strategy that includes both beta and alpha, often referred to as a “core and satellite approach” (see illustration below), the core must be allocated the lion’s share of the portfolio. The core portion of the portfolio is the portfolio’s source of beta returns. It is difficult to keep up with a market benchmark if you don’t have a large portion of your portfolio invested in asset classes represented in the benchmark.

There may be times when a bond portfolio does as well or better than a stock portfolio, but over time you are not likely to get stock-like returns from a bond-only portfolio. And the same goes for getting bond-like risk management from a stock-only portfolio.

Therefore, it is important to invest a sufficient amount into the core strategy to make a difference. It has to be enough of an investment to allow the portfolio to keep up with the benchmarks.

In my opinion, 20% to 50% of the portfolio is not enough for a core position. I would prefer to see at least 60% to 70% allocated to the core in order to increase the probability of obtaining the desired amount of beta or market returns for our clients.

Core strategies are pre-allocated to stocks, bonds, and (in some cases) alternatives. They come in various combinations to achieve a level of risk consistent with a number of preselected suitability or risk levels. As a result, three or five combinations ranging from Conservative to Aggressive mixes are usually offered.

How should a core portfolio be managed?

Conventional wisdom is to simply diversify among a selection of different passive index funds. The percentage invested in each is determined by both the suitability level and the interaction of either past or expected returns, volatility, and correlation of the various asset classes.

Unfortunately, this method is subject to a number of flaws. Studies show that the mean-variance methodology used by most of the industry is not robust. It explains the past with the precision that only hindsight can deliver but fails to deal well with an uncertain future in which we all invest.

It cannot respond to new market environments. It remains fully invested no matter how dire the present is or the future looks. Adjustments (so-called quarterly rebalancing) are determined by the calendar instead of market changes.

A better way would be to adopt the time-proven advantages of diversification—creating stock and bond portfolios based on investor suitability but overlaying these portfolios with risk-management methodologies. This is the approach of our dynamic, risk-managed core strategies.

The advantage of this approach is that you seek to capture the index betas—for bonds, stocks, and alternatives—while building in risk protection beyond what simple diversification can accomplish. The approach is responsive to market changes and is meant to be robust for future market conditions and risk environments.

Find the core strategy that’s right for you

We have several risk-managed core strategies. Each takes a different approach to capturing market beta in a suitability-based wrapper while employing disciplined risk-management systems. Whether you are looking to put trend following or leverage to work for you or searching for faith-based or socially responsible approaches to effectuate your personal values, there is a core strategy for you.

And with our Quantified Fund Credit (QFC) strategies, multiple core strategies are available at a very low cost.

What I especially like about the QFC strategies is that they each employ two levels of risk management. First, each mutual fund invested in employs multiple risk-management strategies within the funds. Then, an extra layer of protection is employed via the allocation method used among the funds. Two levels of risk management for one low cost.

Finally, with so many core strategies available at Flexible Plan Investments, it is possible to double down on risk management by dividing one’s core portfolio into multiple dynamically risk-managed core strategies.

In our tests here at the office, I’ve seen better results using a number of core strategies in a single portfolio than in placing all assets in one, albeit risk-managed, basket. For example, you can easily create a portfolio with four different core strategies of 20% each at the investor’s suitability level, and then invest the final 20% in some alpha-producing strategies. My testing shows that a smoother growth line results, as the added diversification of multiple core strategies can further reduce volatility.


For more information on how a multi-strategy core approach can address the drawbacks of a passive portfolio, download our white paper “A passive core is not enough” here (for financial professionals only).

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