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