Are you gambling with your portfolio?

Are Advisors Losing Faith In The Buy and Hold Approach

Thesis: Both clients and advisors have a hard time letting markets work over the long run. It takes an incredible amount of discipline and patience to stock with a prudent, low-cost buy-and-hold approach when the world appears to be falling apart.

Here’s what we all feel: “More and more, financial advisors are losing faith in conventional buy-and-hold investment strategies. Those strict asset allocation models just don’t seem to work in these uncertain times. Instead, advisors are turning to money managers that try to consistently outguess other portfolio managers.”

I think it is funny that, despite buy-and-hold’s stellar long-term track record, as well as the dismal statistics surrounding dancing in and out of markets, the many other names we give to trying to outguess other market players (sector rotation, tactical allocation, market timing, relative strength, etc.), very few of these strategies work over the long term and should be avoided, no matter how sexy they look.

What strategy has been proven, and what does MWA recommend?

Core+ Methodology ^TM

We recommend a passive portfolio that maintains broad global diversification tilted toward the three equity factors that have consistently provided higher-risk adjusted returns. These are the same factors Mr. Buffet attempts to capture in his portfolio, albeit in a different manner.

• Value: +5% (stocks trading close to their book value)
• Size: +3% (smaller stocks over larger stocks)
• High profit: +5% (higher-profit companies over lower-profit companies)

Combined with this portfolio, we recommend a defense of high-quality fixed income (bonds) that protect from market declines. We make our money through stocks, and when markets decline, our bonds provide stability and capital so we can buy when markets are low or meet income needs, depending on our stage of life.

This well-proven, institutionally designed portfolio has worked for decades, and I believe it still works today. If asset class funds are tilted to the three factors described above, value should be added above traditional index funds in a very tax-favorable manner. If a better, more reliable strategy exists, we have not found it. Be strong, ignore “the noise,” and stick to your plan. If you don’t have a partner you respect, I recommend that you find one, as studies have shown that a good advisor is worth much more than he or she costs — often as much as 3% per year.