Investment Services
What is Active Management?
Active investment strategies designed to manage risk and position investments to benefit from market cycles are the best means of building financial security for clients over the long term.
These 'Active Management' investment strategies tend to fall under the following broad classifications:
- Market timing
- Fund timing
- Sector timing
- Dynamic asset allocation / Tactical asset allocation
Smith-Mottini Financial Advisors prefers the use of Dynamic and Tactical Asset allocation strategies.
Information courtesy of NAAIM.
What are Dynamic and Tactical Asset Allocation Strategies compared to Marketing Timing?
Market Timing is founded upon the belief that market events are not random and that discoverable relationships exist between different data and the performance of financial markets. Using computers, professional market timers have developed timing strategies that take advantage of these relationships. These strategies look for long-term trends in the market's fluctuations to detect periods of sustained up or down movements. During an up leg of the market, investments are put into equities to maximize return. When the market appears to have hit a top, investments are moved into cash or bond positions until the next up market.
Typically market timing is differentiated from active forms of asset allocation by the investment manager's willingness to make 100% moves between asset classes. Pure market timers use technical analysis to determine when to make moves completely in or completely out of specific asset classes. In most cases, these asset classes include US stocks, money market funds and bonds.
Dynamic asset allocation, also called tactical asset allocation, is an active investment approach that distributes assets among the different assets classes in domestic and international equity and bonds investments and money markets. That distribution is adjusted on a continuing basis in response to market and economic conditions, based on the adviser's perception of the return potential and relative risk of each asset class.
Dynamic asset allocation, like a "fixed" asset allocation strategy, seeks to reduce risk through diversification among different investment categories. Using dynamic asset allocation, however, investors select or weight investments based on those categories with the greatest perceived potential for superior returns, given current market conditions. The allocation of assets becomes dynamic—changing in response to market conditions and perceived opportunities for profit.
Why has dynamic asset allocation worked? The financial markets tend to move in cycles. Over a century of market history has clearly shown that dissimilar investment categories behave differently at different times in the economic cycle.
Information courtesy of NAAIM.
Why does Active Management make a difference?
Modern portfolio theory holds that the marketplace demands a higher rate of return from higher risk investments. This has proven true for the stock market, which has historically outperformed most other forms of investments, but at the cost of subjecting investors to greater volatility or risk. Risk is defined as the variability of an investment's returns over time.
The stock market has historically outperformed virtually all other investments, but it has produced great volatility. Between 1929 and 1998, there have been 13 bear markets, periods when the S&P 500 has fallen at least 20%. The average bear market caused stock prices to decline 39%. Omitting the 1929 crash, when values declined 87%, there was still an average loss of 33%. During those 70 years, a new bear market began on the average of every five years, and lasted 17 months. After the bear market bottomed, omitting the 1929 crash, it took an average of 3.5 years just to break even.
Active Management is designed to 'pull the plug' and add an additional layer of security for a portfolio that cannot afford to experience significant volatility but would like a higher rate of return than what can currently be guaranteed.
Information courtesy of NAAIM.
[Top of Page]
|
