Are Aggressive and Active the Same?

My family and I spent last weekend in Savannah, Georgia at my son, Jonathan’s State Shotgun Tournament enjoying friends, family, and good conversation.  It was a great weekend and fun for all.  It is a great up-and-coming sport if you have not checked it out (link at bottom of the page to SCTP).  

While I was talking with a new friend from the team, he asked what I did for a living and from there the conversation moved quickly to the markets, investing, and the like, as it often does. As an aside, it is funny how stand-offish some are about their money and finances in a private meeting that is regarding those specific topics, yet how often when someone finds out what I do in a social setting, the questions flow faster than the wine. To me, that shows the sad distrust that has been built for our profession and the fear of being “sold,” but I digress. As our conversation progressed, this gentleman said something I hear a lot and feel needs some clearing up.  

When I mentioned that I am a CFP® and an active portfolio manager, his immediate response was, “I used to be very aggressive with my investments when I was younger, but as I got older, I have become more conservative and let it work.”Often, but not always, accompanied by a story of how they did well for a while then something went wrong and they gave it all back (we’ve all been there).

This is a fairly common response when I explain how we manage our clients’ assets actively to strive for both growth and protection over the long term while always searching for good opportunities.It seemed like all they heard from my story was aggressive even though I never even used the term.

I guess the financial industry (Institutional investors, financial advisors, and financial media) has done a good job over the last two decades convincing retail investors that the markets are untamable and therefore you should not even try to improve returns, and the only way to reduce risk is to diversify so thoroughly that nothing can hurt you too badly. It is great for the industry as it keeps the money sticky in their products and allows advisors more time to cultivate new clients instead of using it on market research, especially if you have already been conditioned to believe you can’t make a difference anyway.  I am not saying this isn’t a viable strategy in the industry, but I will save the discussion of “striving for mediocrity” for another post. I just do not think it is the only, or even the best-suited strategy for the end client, especially someone getting closer to or in retirement. 

Think of it this way, during your working years you are constantly adding to your investments, which helps buffer the market swings and even make them an opportunity, but once you retire and stop adding, then it becomes more important to protect the asset base you built for as long as you need it. Buy and hope (hold) attempts to diversify things out so far that nothing big will hurt you, even if no one is paying attention (and most of the time, they are not). Sometimes it is hard to hold through fluctuations, but that is what you are taught and told to do; that activity opens the door to missing out and automatically increases risk. Each time, I find myself explaining why we see it differently. I have been telling this story for more than 21 of my 27 years in the industry, but it still comes up every time as the industry conditioning is pretty thick by this stage.

Active and aggressive are two distinctly different investment components that get lumped together much more than they should. Simply put, aggressiveness is a style and risk category. Active is a tool.  As with all tools, it takes a level of knowledge and skill to wield it correctly. Therein lies the real issue, a lack of both.

Since this transition to buy and hold, most advisors have given up on investments and focused their efforts on life planning for their clients while charging them fees on those investments. This practice is a concept I still can’t understand. We do planning too, but we are paid to manage portfolios and protect assets which is the base from which all planning is built off. We feel our job is to help our clients find ways to achieve their goals and provide them as many options as possible to get there. So, the better we can grow and protect the assets, the more options they will have to choose from making it easier for most of those goals to be accomplished.  

Activity can be a byproduct of an aggressive approach, which effectively increases the need for activity due to the higher risk levels of the securities that are being invested in. This is how these two concepts are most often paired in the eyes of investors. 

Our approach takes a different view on activity. We see activity as a way to protect what we have while allowing us to consistently pursue the best ideas our research process is presenting at any given time. The key here is having a process that can clue you in to the current market environment you are in and, better yet, one that produces a consistent flow of investment ideas in any market environment.  Even in down markets, if you are in the best performers, you can relatively outperform which would be effectively reducing your risk.

When the markets are strong, if you are in the best areas, it can serve to provide a buffer for the tougher market environments that we will have to endure later.  We don’t look to day trade or flip investments quickly. Once strong opportunities are found at good entry levels, we hold them as long as we feel the opportunity is still there. The majority of those investments can be held a year or sometimes much longer, but If the information changes and we lose faith, we are fine changing our allocations gain or loss very swiftly. This is made easier by knowing we will always have a few stronger ideas on deck as soon as the opening arises coming from our Power Investing process. Having the right tools, including activity, can improve both sides of the risk/reward coin if executed properly through a consistent focus and tested process as we employ in our strategies.

This concept has many offshoots we could go into, but this is good for now as it goes against most of what we have been told for a while now.  In the coming weeks, I will be going into deeper explanations of those offshoots to get a closer look at why activity can reduce risk and provide protection for a portfolio which we believe can be one of the best tools to improve portfolio returns over the long-term journey.

To get posts sent to you directly when I publish them, sign up for our email list at https://relativitycap.com in the footer; if you’re not ready to sign up just yet, check back next week, and I will be digging deeper into this concept.  

Good luck! it is there for the making!

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