Over the long-term, investors need stock exposure to help them achieve their financial goals.
It is helpful to examine how stocks have performed over the years. From 1906 through 2008 there have been a number of alternating secular stock market regimes. On average, secular markets have lasted about 12 years and some have gone over 20 years.
The characteristics of alternating secular stock market regimes are very different:
Secular bull stock markets are usually obvious.These markets generally trend up and although they do have some downward spikes, they typically have rebound quickly.Secular bull markets are market regimes in which the general up-trend in equity prices benefits portfolios.
Secular bear/range bound stock cycles, in contrast to the consistency of secular bull markets, tend to be violent and choppy with sharp declines followed by abrupt increases.Secular bear and range bound markets are market regimes in which this high volatility requires considerable skill and work in investment management to benefit portfolios.
The basis of our investment philosophy in the core area centers on three concepts: Concept One: We believe that asset allocation, or how an investor distributes their investments among various classes of investment vehicles, is a very important decision in long term investment management.
Concept Two: Different stock market regimes (secular bull or secular bear/range bound markets) require different approaches to portfolio strategy.
While asset allocation has been responsible for 90% of the variance in portfolio returns, there are various approaches to asset allocation ranging from fairly broad and stable allocations, to highly tactical approaches that can shift at anytime to stay aligned with changing market environments.
There are four approaches to Asset Allocation that we may consider for use in construction of your investment portfolio, each providing unique advantages and attributes in the various market environments.At times your portfolio may be comprised of one or more of these approaches:
Strategic Asset Allocation - Strategic approaches create a mix of asset classes designed to capture market returns based on long-term capital market assumptions, while balancing risk and volatility. The goal of a Strategic Asset Allocation approach is to put the positive winds of “sailing” markets to work in your portfolio.
Tactical Constrained Asset Allocation - Tactical Constrained approaches attempt to capture broad market returns while also seeking to take advantage of shorter term opportunities or mitigate risks through moderate allocation shifts. Tactical Constrained approaches may also put the positive winds of “sailing” markets to work in your portfolio, but they also create the potential for the portfolio strategist to add additional value through active, near term allocation decisions.
Tactical Unconstrained Asset Allocation - Tactical Unconstrained Asset Allocation approaches remove the limits on the extent and frequency of allocation shifts, allowing the portfolio strategist to move more aggressively in response to changes in their outlook. Tactical Unconstrained Asset Allocation approaches can provide flexibility for “rowing” markets when headwinds place a premium on active asset class management.
Absolute Return Strategies - Absolute Return strategies are for risk-averse investors comfortable with modest returns in exchange for highly active risk management that may include frequent allocation shifts, non-traditional asset classes and/or alternative strategies. Absolute strategies may be used for attempting to “row” toward your goals regardless of the stock market's direction.
Concept Three: The possibility of success may be enhanced by the ability to properly match these two areas (asset allocation and portfolio strategy) through the use of open architecture. Open architecture describes an investment platform purposefully designed to provide significant choice and differentiation, giving investors the desired flexibility and scope to customize their investment strategies and adapt to changing conditions in secular stock market regimes.
At The Foundation Investment Group, we work with product sponsors that closely match our investment philosophy. These product sponsors can provide investment products in all four asset allocation areas. This gives us maximum flexibility to match investment requirements to whatever the current secular stock market regime might be in an effort to enhance the opportunity for success. Please visit the 'Strategic Partners' tab on this web site for more information about these product sponsors.
As always, past performance is no guarantee of future results. Asset allocation does not assure a profit or protect against a loss in declining markets. The financial consultants of The Foundation Investment Group are Registered Representatives and Investment Adviser Representatives with/and offers securities and advisory services through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.
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