Back in the frothy run up to the dot.com crash in the late ’90s, I had the temerity to tell a group of financial planners that they might want to think about letting their clients enjoy a small portion of the very handsome profits they’d accumulated over the preceding bull decade. My thinking was that it’s easier for people to stay
disciplined when they can see a tangible benefit from their dogged sacrifices. I wasn’t suggesting anything major–a long vacation in the south of France, a bigger diamond for the missus, or a better country club–anything that would let clients feel rewarded for their diligent saving and investing. Seemed reasonable to me.
Well, you would have thought I suggested tripling the capital gains rate. That asset-allocating, buy-and-hold crowd turned on me like Glenn Beck at an Acorn rally. “That’s market timing;” “It’s speculating;” and it “undermines the financial plan;” are but a few of the heresies I apparently committed. It was at that point I realized Modern Portfolio Theory had moved way beyond an investment strategy, approaching near religious status, with Roger Gibson as its patron saint. I was lucky to get out of there with my assets undiversified.
Ten years and a couple of market meltdowns can certainly change people’s perspectives, can’t it? These days, advisors are questioning the wisdom of statically diversified client portfolios like never before. That’s because we haven’t seen times like these since the Great Depression. The $64 Trillion Question (you know, a trillion here, a trillion there…) is what will financial planners do instead of periodically rebalancing buy and hold portfolios? The leading candidate du jour appears to be “buy and harvest,” which makes sense to my client-rewarding mind, and this new-found risk consciousness may just be the silver lining to this whole darn mess. But advisor beware: the financial industry has never lacked for folks who claim to reduce or even eliminate market risk. Finding truly lower risk strategies is a lot harder than it is enticing.
This past October 1, Jeff Cox wrote a story on CNBC.com titled “Bye-Bye to Buy and Hold” in which he proclaimed: “The time-tested buy-and-hold investment mantra has become so unpopular that even those who advocated the strategy don’t refer to it by that name anymore. Now terms like ‘buy and harvest’…have replaced the old philosophy.”
Cox then went on to quote John Buckingham, chief investment officer at Al Frank Asset Management, in Laguna Beach, California, who includes his firm in the buy-and-hold camp “sort of.” That “sort of” means Buckingham is a long-term, value investor, but with the flexibility to “follow the money,” or as he puts it: “buy-and-continue-to-monitor.” Which makes him a buy and harvest guy.
I had a chance to catch up with Jeff Montgomery, the CEO of Al Frank AM. Jeff’s been around almost as long as I have–including stints as CEO of NFP Securities, and as CEO of ING’s Washington Square Securities–so we had a great chat about the industry’s past, present, and future as we old guys like to do. The firm he now heads was built on the success of The Prudent Speculator, an investment newsletter launched in 1977 by the now deceased Al Frank.
Montgomery added some anecdotal confirmation of Cox’s asserted demise of buy and hold: “I’ve given talks to about 3,000 financial planners in the past two weeks,” he told me “on their current approaches to portfolio management. I’d say conservatively that about two-thirds of them have a “buy and harvest” mentality; meaning they’re either currently doing it, or embrace the strategy and are in the process of converting to it.”
Now, anyone who knows financial planners also knows that they tend to be like a herd of cats: two-thirds of any group of planners agreeing on anything (beyond today’s date, which might even be a stretch) is an astronomical number. As value investors, Al Frank Funds already lean toward the buy-and-harvest mentality, so I’m guessing that any group of advisors who goes to hear Montgomery speak is already skewed in that direction. Still, it’s a big number, considering that just a year ago, the buy-and-holders would probably have comprised 90%.