Financial advisors, generally speaking, need to possess a balance of hard and soft skills to succeed. They include digging deep to find out what makes each client unique and determining a risk profile; becoming adept at rebalancing, retirement planning and tax-conscious asset allocation; and making sure they build enough trust so that clients don’t fixate on the ups and downs of each market session.

There’s no way around it: These are all tried-and-true tenets, and advisors should hold them dear. However, for the sake of their clients, advisors need to re-think another dogma: an allegiance to “buy-and-hold” portfolio management.

That may seem blasphemous to some, but heightened volatility during the past several months and the prospect of lower returns over the next few years do cast serious doubt on the validity of the buy-and-hold mantra. What makes more sense going forward is a “buy-and-sell” strategy for investments, which calls for taking losses while they are relatively small.

Hidden Risks

A pure buy-and-hold philosophy, which is common among advisors who favor mutual funds, is riskier than it appears. Holding too many passive, index-based funds over the long term is tantamount to sacrificing gains, since it exposes clients to avoidable losses associated with portfolio contamination and style drift. A full-bore active approach minimizes this, but also requires a level of expertise, time and staffing that most advisors do not emphasize.

The key, therefore, is to find a way to be nimble enough to cut losses while remaining prudent enough to be consistent. The approach can range from simple to sophisticated. The precise timing of transactions depends on each client’s needs, the advisor’s investment philosophy and product selection. As a rough guide, quarterly transactions may be a good compromise between excessive trading and inattentiveness.

Rebalancing

To be sure, across-the-board rebalancing of the client’s entire portfolio to realign its intended investment weightings is one approach, albeit one that does not differentiate the advisor from his or her peers. A good alternative is tactical rebalancing, which is a somewhat more active trading strategy with the dual goals of augmenting portfolio returns and minimizing risk.

It can be challenging – even impossible – to accomplish this consistently depending on the client’s risk profile and the broader market environment. Plus, evidence suggests that more frequent rebalancing can lead to lower absolute returns on average.

Tax-Loss Harvesting

A related approach is engaging in tax-loss harvesting with individual holdings that have lost value. This maneuver demonstrates more sophistication than non-tactical rebalancing but is still a standard practice across the industry. Still, clients will appreciate advisors who show the initiative to sell underperforming securities throughout the year, which could simultaneously provide more promising opportunities and offset their capital gains taxes.

On the other hand, advisors must be careful to remind clients that tax-loss harvesting should not dictate investment strategy as much as inform and complement it. In addition, advisors ought to work closely with each client’s accountant to ensure that pursuing a strategy like this won’t complicate their broader tax plan. 

Unit Investment Trusts

UITs are another option, having the advantage of following a specific investment theme that is professionally selected by third-party asset managers. These vehicles have a finite lifespan of, on average, about 15 months, adjusting the weightings of their underlying holdings based on market conditions for each new series and only realizing capital gains if the client sees a profit when exiting.

However, advisors should use only those UITs with the most compelling investment themes and be open to swapping in different UITs once the old ones expire, based on market sentiment and the performance of the underlying securities. The best UITs allow advisors to focus their efforts in one area with almost laser-like efficiency, providing both diversification and targeted allocations of high conviction companies. What that looks like in practice is holding the most relevant security that drives, say, the e-commerce value chain or the production and flow of top-quality multimedia content.

Better Together

Some advisors are understandably concerned whether stocks can experience another wave of outsized gains in the wake of one of the longest bull markets in U.S. history. Others may just be in search of better investment performance for their clients. Either way, a good first step would be to replace outdated buy-and-hold portfolio management with something more suitable for today’s volatile markets.

Advisors can tailor buy-and-sell strategies for each client, based on their personal goals and financial situation. In many of those cases, advisors should strongly consider combining regularly scheduled rebalancing with tax-loss harvesting throughout the year, while bringing in UITs to round out some of the portfolio.

Dryden Pence is the chief investment officer of Pence Capital Management a leading Newport Beach, California-based third-party asset manager.