Even when the markets are perfectly calm, there is always a headline that evokes concerns about a recession. The Greek default, toxic Chinese debt, and Brexit are all recent phenomena that have induced doubts about the livelihood of this record bull market. These uneasy events are inevitable, but you have to hang in there and stay invested. For example, if one held their portfolio in the S&P 500 between June 2015 and June 2018, they would have experienced a total return of 30.7%. There were plenty of events in the last three years that sparked worries about a recession, but as you can see, it pays to hold your investments. Staying invested through uncertain moments, while adjusting asset allocations during opportune times, is one of the most lucrative things an investor can do to drive the most returns.
It pays to stay invested and there is research to prove it. A study published in The Financial Analysts Journal* was one of the first to uncover this notion. More research** chased this same idea when a group of financial analysts researched over 5,000 mutual funds to measure asset allocation vs. active portfolio management. They concluded that about 75% of returns were explained by the movements in the market. That means that by solely staying in the market, you can receive about 75% of returns through mutual funds. This study highlights the fact that you need to stay invested in the stock market in order to see the most returns.
Asset allocation and active management accounted for the other 25% of the returns in the study mentioned above. This means that returns can be enhanced to outperform the market with active management of the portfolio allocation. There is a strategy called tactical asset allocation where the portfolio’s assets are weighted differently based on market conditions and future expectations. Taking a conservative approach to tactical asset management is the best approach one should take. If famous investors are calling for a recession in the next six months, it does not make sense to sell, as chances are that you will miss out on some returns. The best action for a money manager to do is hang onto their clients’ target portfolio allocation until they can accurately tell that we are headed toward a recession. This approach integrates both the strategies of staying invested and knowing when to adjust asset allocation.
At Fogel Capital Management, Inc., we’ve been investing for over 20 years and have experienced quite a few recessions. We know that we have to allocate your assets in a way customized to you. We make allocations that protect you and make adjustments to your portfolio that best reflect your investment profile. If you would like to discuss this article further or have us look over your portfolio, please call us at 772-223-9686 to set up a free portfolio consultation. We look forward to meeting with you.
* “Determinants of Portfolio Performance”, The Financial Analysts Journal
** “The Equal Importance of Asset Allocation and Active Management”