How far we’ve come.
The plethora of new products and strategies to help with portfolio management is something at which to marvel. Yet the confusion that accompanies many, and how, exactly, they’re best deployed, it a constant struggle for the advisory industry.
“A big issue is the way investment solutions have changed and evolved over the past 10, 15 and 20 years, and how it helps investors today, especially with interest rates as they are,” says Dave D’Amico.
Twenty years ago, it was pretty simple, notes the president and chief market strategist of Boston-based Braver Capital Management .
“As someone entered retirement, you’d take them down the risk curve by incorporating more fixed income investments. At the time, Treasuries not only had the safety they were known for, but were also offering 6% and 7% yields.”
Today, however, you have all these new alternative investments and tactical strategies in addition to traditional equities, fixed income and cash, D’Amico adds. Although interest rate risk is rising, fixed income investing is still relatively safe if one holds to maturity; however he emphasizes that yields will no longer support clients in retirement, and have advisors wondering what to do.
So what, exactly, should they do?
“Alternative investments and tactical strategies can deliver hedge-fund-like returns with risk that approximates fixed income but they can also provide a competitive total return as markets advance,” he argues. “Many of these alternative asset classes come with a standard deviation equal or less than fixed income, but they get the returns.”
Of course, definitions vary as to what alternative investments really are. D’Amico and his team, which manages $750 million in assets, stay away from managed futures and similar products because “they can get messy, especially in rising markets.”
“We keep it clean, and have a number of tactical rotation strategies that strategically move to cash when appropriate,” he says.
In this way, investors get the upside participation and downside protection so many crave.
“One common allocation is to have roughly 33% of our portfolio in equities, 33% in fixed income and 33% in tactical rotation strategies, with tactical rotation on the rise.”
Like many, he concludes that modern portfolio theory isn’t dead, but it has to evolve.
“You can’t stay fully invested with today’s volatility; it’s just too dangerous.”
Check out this year's Think Retirement Income Conference in Boston on Oct. 10 and 11. For more information and a list of speakers, please visit www.thinkretirementincome.com.