Advisors are rethinking their fundamental asset allocation strategies.
Henry David Thoreau once said, "Things do not change; we change." But if you look at what's been going on in the uneven world of investing during the past three years, Thoreau might be singing a different tune.
Indeed, if financial advisors were to interject, they might tweak the quote to read, "Things indeed do change, and we're trying like heck to change along with them."
This is particularly the case when it comes to the strategies advisors are using to manage their clients' assets in a volatile market. Shaken by the swift transition from a nine-year bull market to a stubborn bear market, advisors are trying to get client portfolios on an even keel again. As a result, they're doing a lot of rethinking of their asset allocation strategies. Whether it is a case of going from passive to active management, or buy-and-hold to technical analysis, the fact remains that the market's unpredictable ways have caused many advisors to make dramatic shifts in their asset management philosophies-even with the recent market upswing.
The success of these changes won't be known for some time. But for many advisors, the decision to change ultimately came down to this reality: You can't change the market, but you can change your approach.
"I would think you would have a hard time finding advisors who have not decided to rethink their strategies," says Ben Utley, president of Utley & Associates, wealth managers in Eugene, Ore. For Utley, the decision to change came at the start of the year, when he shifted client assets from intermediate- to short-term bonds with the expectation that interest rates would edge up. He even surprised himself the year before by moving into and out of junk bonds. He's also considering going into privately held mortgage notes.
Utley, of course, realizes there is irony to the fact that he and other advisors are scrambling to adjust strategies-some much more drastically than he has-in the face of an uncertain market. Theoretically, a good asset allocation should stand up to any kind of market, negating the need for constant rethinking. "The whole point is to stick to it because of 70-some odd years of history," he says. "If it worked through assassinations, world wars and the fall of the Berlin Wall, it's probably going to work going forward."
Yet he, like other advisors interviewed, say the reality of investment management is somewhat different. "I think that as advisors we try to control what we believe is in our control," he says. "The purists will ride things out, but see their client bases erode. And then the purists won't be around. That's the real problem."
Some advisors have retooled their investment tool chest more drastically than a reshuffling of bond holdings. Over the past couple of years, Steven Landis, owner of Landis Financial and Investment Services of Columbus, Ohio, has undergone a complete reversal in thinking as an investment advisor. Landis had been a straight buy-and-hold proponent for 20 years with good success. He would practice asset allocation with a spread of about five or six different classes of funds and usually average returns of about 10% to 12% a year.
But then the Nasdaq crashed in March of 2000, and then came September 11, 2001, which Landis feel shook up his clientele to the point where they needed more hands-on treatment. "At that point, they pretty much had had enough of the market," he says.
Deciding he'd had enough of buying and holding, Landis shifted to active management based on technical analysis. He's also added a high-yield junk bond program to his management system, as well as small- and micro-cap sector trading.