It’s well known that a diverse portfolio of assets could be a way to reduce stock market risk, but have you considered the positive benefits of diversifying by portfolio management as well?
The key to using multiple portfolio managers is to use managers that have differing methodologies in how they manage assets during different economic cycles. For example, let’s say one manager uses a tactical management approach, the next uses algorithmic trading and the third uses modern portfolio management. You will likely see a wide range of diverse assets being used. Some portfolio managers may do better than others during different economic cycles, which could generate a more consistent return over time.
Let’s break this down further.
Tactical Money Management
Tactical means action so a tactical money manager will be very active with their management. This manager will make multiple trades in a short period of time to capitalize on shifts in the economic cycle. Since most trading platforms or brokerage sites offer zero commission options, you should not incur any transaction fees with this style of management.
An algorithm is a computer program or possibly artificial intelligence that monitors economic charts and cycles to better identify trends in the economy. For example, the algorithm may see the beginning of an upward trend in the equities market that could give the manager a leg up to take advantage of buying opportunities. Conversely, the algorithm could see early signs of a downward trend in the equities market and signal that I may be time to harvest gains and get out before losses could be more significant.
Modern Portfolio Theory
This is a more traditional approach to investing with a predetermined allocation between stocks and bonds. This commonly is 60% stocks and 40% bonds but could change based on the owner’s risk tolerance. Often, this allocation is rebalanced on a quarterly basis while the money manager maintains the ability to make tactical changes based on the direction of the economy. This traditional buy and hold approach has proven to be successful if the investor has time to ride out the down turns in the various markets.
Each of these management styles can thrive during changes in the economy and often will invest in different options depending on what is occurring in the economy. Using multiple managers would be useless if they all had the same methodologies and invested in the same asset classes and investment vehicles. For example, different managers all purchasing a similar large cap value ETFs or mutual funds will often have the exact same holdings inside the accounts which can quickly eliminate the diversification we were striving for.
When a person diversifies by portfolio management, they may see one of the managers thrive one year while the others may have modest gains only to see the successes reverse the next year as the economy shifts. To be honest, few portfolio managers experience significant success year in and year out. By adding multiple managers, you should be able to experience a more consistent return on your entire portfolio which is often our goal as we approach retirement and the new distribution phase of our life.
It’s important to work with an independent licensed fiduciary or Investment Advisor Representative(IAR) if you want to diversify by portfolio management. Working directly with a captive, big box brokerage company or bank will only give you access to their predetermined allocations with few management options.
Schedule a no-cost appointment (phone, Zoom or in person) to see how diversifying by portfolio management can help you today. Click here to schedule your appointment.
Written by Marc Montini, IAR and licensed fiduciary.