Markets: News  

Chuck Jaffe

If your portfolio ain't broke, don't fix it

6/1/12 6:01 PM ET (MarketWatch)Print

BOSTON (MarketWatch) -- Most people seem to agree that "If it ain't broke, don't fix it."

But people may not know whether their investment strategy is broken or not. Instead, due to losses or slower-than-expected gains they feel like they're going broke, and that spurs them to make a change -- too often in haste.

It's not just individual investors who do this, it's financial advisers too.

For proof, consider a recent study of advisers and wealth managers from Natixis Global Asset Management, which showed that the pros are feeling that traditional diversification and portfolio-construction techniques need to be replaced.

Further, the study showed that advisers are "questioning the relevance of time-honored asset-allocation strategies … and long-term buy-and-hold approaches."

Half of the financial advisers who have been in business for less than 15 years are ready for the "out with tradition" approach; more than 40% of advisers with more experience are ready to toss the old ways too.

But what if it ain't broke?

The problem may be more in the eyes of the individual or wealth manager than in the bedrock investment beliefs and historical strategies.

It's a classic chicken-and-egg dilemma. The market could simply be in a period where the long-term strategies appear out-of-favor with the market -- something that has always happened on a cyclical basis -- or it could be that the old ways no longer work, but it's impossible to know for sure which came first, and is therefore driving the investor's decision.

'New and improved'

That's doubly true for consumers who work with investment advisers, because "tried-and-true" may work, but it's a tough sell compared to "new and improved."

"What's funny about new paradigms is that they are based on old fundamentals," said John Hailer, president of Natixis. "No matter what type of investment product you want to talk about … at the end of the day, it depends on your horizon, what you need the money for … and all that comes into play."

Traditional investment methods -- like a 60/40 mix of stocks and bonds for the long haul -- "might get you there," Hailer noted, "but how do you live with the volatility and risk? People want to sleep at night with their portfolio … so we try to say there is a better way to manage in up and down cycles."

But just as it is tough to tell if a financial strategy is broken, so can it be hard to say that something is "better."

Both judgments tend to be made based on what has happened lately, highlighting a bias on recent events that tends to overvalue the immediate past as a guide to the future.

Interestingly, the Natixis study showed that 80% of advisers say the majority of their clients are "torn between a desire to increase returns and the need to keep their investments safe." In short, they are caught between the twin devils of greed and fear.

Time and timing

The real issue, therefore, becomes that if their most recent market experience has them scared, they want to hurry for safety, but if recent events make them feel like they are missing out on potential gains, they will take more risk.

Ultimately, this is less about which market strategy works than what an investor can be comfortable with.

The truth is that there is no one right way. Savvy long-term investors have been rewarded for their patience and consistency, while smart tactical market-timers have been able to make money and mitigate risks.

Virtually every strategy has its success stories, and its failures.

Talk to a legend such as Jack Bogle, founder of the Vanguard Group, and it's hard to believe that long-term buy-and-hold, balanced-portfolio investing is dead. But talk to another investment legend like Bill O'Neil, founder of Investor's Business Daily, and you will come away convinced that tactical market moves and playing it safe when the market is fraught with danger is the right way to go.

Both can be right.

The problem investors must guard against is the potential to move from one strategy to the next, again and again, each time they think the old strategy isn't working. They make each move expecting something better, but never get the most out of any strategy.

It's possible that both advisers and investors are coming to the conclusion that the old methods don't work based on the real results in their portfolios, over the long haul.

It's equally possible that these investors are "evolving" because the market has been so bad for so long, and they need to come up with a strategy to justify their existence (advisers) or their continued need to save (investors).

That's what happens when you go through what amounts to a "lost decade," and when the people who changed strategies can talk about the things that worked out for them (they typically forget to mention the things that failed).

It's what happens when you buy while the market is in an outsized period of growth -- like the Internet bubble -- that makes you feel that good returns should always be there if you just do what is working at any given moment.

The issue for investors (and their advisers) should be less about finding the "best strategy" and more about finding out what works on a unique, individual basis.

No matter the strategy, it has to be right for the individual investors' temperament. If the "best strategy" is something besides long-term fundamental investing, but it involves more trading or investment types that you're not comfortable with, then it's not the "best strategy for you."

If you're comfortable with your strategy and have the emotional discipline to stick with it, don't change your approach just because the current market trend is to try something different.

Emotionally, the change might feel good, but it's important to remember that you might not be fixing your strategy; you could be breaking it.