Accumulation or Decumulation?
When you're young and trying to accumulate assets, you might use a more aggressive strategy than when you are no longer working and need to ensure against outliving your "nest egg." Remember, higher returns usually require taking more risk.
When it's time to begin reducing your risk, aggressive strategies should be reduced and less risky strategies increased to ensure adequate funding for known expenses. Hopefully, assets still in aggressive portfolios will not have to be used for making withdrawals while recovering from previous losses. It's not intuitive why this is so important. Suppose you have $1000 invested and you take a market loss of 40%. Your new balance is $600. Then, you enjoy a 40% gain - the same percentage as your loss. What's your new balance? The answer is $840. You would have had to earn 67% on the $600 balance to recover from a 40% loss.
What is a "buy and hold" strategy and why is it so commonly used?
A "buy and hold" strategy is quite simple. You buy a stock or mutual fund and you hold on to it for a long time.
Even when the market declines, a buy and hold strategist stays with the same investments. In the long run, the market has been resilient enough to surpass previous gains. Many buy and hold proponents argue that by diversifying investments among multiple allocations, risk is adequately hedged. They theorize that if one asset type declines, another is likely to gain.
Over time, this has proven to be a profitable way to invest -- FOR ACCUMULATORS. But what if you're in the phase of life when you're not able to replace a loss. Would "buy and hold" be a good strategy? The answer is, "NOT IN MY OPINION!"
This is precisely why we offer Tactical Money Management. Computer algorithms help us determine multiple factors to help as understand where we are in the business cycle. Have Federal Reserve policies created an environment for businesses to borrow money to expand and grow? Do indicators such as employment rates, consumer confidence, and earnings suggest an increasing "bull" market? If so, we're likely to be more aggressive when choosing investments. If not, we're more likely to invest in asset classes less likely to fluctuate; i.e., utilities, dividend paying stocks, and bonds.
Algorithms are used to help avoid euphoria that is so common when the market seems to be going endlessly up. We determine target prices for every investment - both on the up and down side. When an investment reaches a target, we automatically re-evaluate it. In most cases, it will be sold. This way, we're able to remove much of the emotional side to investing.
Algorithms also allow us to examine "what if." For example, my interest is in socially responsible investing (for more, click above on Sustainable Investing). I'm able to group stocks, mutual funds, and exchange traded funds that conduct business along the parameters of what I consider to be socially responsible. Then, the algorithm allows the ability to see how these investments would have performed if they had been purchased in the past. Different choices can be added or subtracted to or from the portfolio in an attempt to reduce volatility, optimize performance, and make more money! Of course, past results cannot be used to predict the future. But to me it makes sense to use every tool available when choosing investments.
Continue Reading to better understand the applications that we offer for the use of algorithms!