Fortunately, there are several proven practices that may improve returns during tumultuous market corrections. When markets grind lower, volatility tends to elevate and liquidity suffers. Trying market conditions increase the temptation to sell all assets without differentiating between better and lesser quality. During these “risk-off” time frames, discipline and adherence to proven practices can add significant value and perhaps, more importantly, save clients from themselves. Human nature is a wonderful thing…but not in fast markets. 

Core-satellite is a well-established approach to portfolio construction offering enormous potential benefit to taxable investors. Core investments are focused on less active, lower cost managers who emphasize competitive “market-like” pre-tax returns with the potential for improved after-tax performance. Satellite strategies typically offer unique return generating, if not diversifying, investment exposures.

Through the use of separately managed accounts (SMAs) advisors can support the more advantageous treatment of each individual security in the portfolio. Unlike mutual funds or ETFs, SMAs are made up of independently tradeable securities reported on as a whole. Through a core-satellite approach and the use of SMAs, investment advisors are able to collaborate with core asset managers to create a more client focused solution offering the potential for significantly improved after-tax returns. After-tax returns may be further enhanced through active tax-loss harvesting. During prolonged corrections, where stock prices fall below their original portfolio purchase prices (or basis), tax loss harvesting opportunities may abound and can be used to offset future realized gains across the portfolio. This strategy can be a great way of adding value to client portfolios when few other prospects avail themselves.

Active trading, under-diversifying, or even momentum investing (buying winners while selling losers–the root cause of many bubbles) are all examples of poor investor judgement driven by behavioral biases and speculation. Creating a buy and hold portfolio supports the avoidance of these behaviors–especially market timing. In a recently published study by Yahoo Finance, missing the best five days over a 20-year time period reduced annualized equity returns by 24 percent. Missing the 20 best days slashed returns by an astounding 67 percent.