Have you ever wondered why your broker doesn't protect your portfolio when the market is crashing?
It seems like a reasonable question to me. In 2008-09 when the market was in a serious free-fall the protection that the average investor thought he had through diversification was absent. That's because diversifying your portfolio is no protection when the entire market is declining. Many portfolios declined by half. It wasn't pretty.
Yet, the mutual funds that constitute the vast majority of American investment remained 100% in the market. You'd think that a professional fund manager would move to protect his clients, but the investor usually expects his stockbroker to do that. The average stockbroker, however, is constrained by the firm he works for. It's a fact that most mutual funds stay at least 80% invested in the market, even when it's crashing.
The Wall Street System
Our investment world has been defined for years by the broker-dealer system. This system says, 'you can't try to time the market. You've got to buy and hold on.'
Modern portfolio theory says that the only thing an investor can do is carry a properly balanced portfolio, since the abundance of instant information available to everyone creates an environment where there are no advantages. In other words, what you know about a particular stock everybody knows. Besides....if everyone began to pull out of the market when it's tumbling what would happen on Wall Street?!
Now, I would agree with the statement that it's very difficult to time the market. But that's not the same thing as watching definite, predictable, and historically accurate market signals and acting on them. That's active (or tactical) money management. And so that leads me to the two kinds of managers who could be guiding your investment funds:
1. Relative return managers
These are managers whose goal is to beat a certain benchmark, such as the S&P 500 or the Dow. If the S&P is down 55% this year (as it was in 2008), but the fund he manages is only down 45% then he's done a commendable job. He'll get a huge raise and a trip to Bermuda. His name will be listed in financial magazines. But his client has just watched his $1 million portfolio drop to less than $500,000!
The vast majority of professional fund managers are relative return managers.
2. Absolute return managers
These guys use a different measuring stick. They don't buy and hold, no matter what, but actively manage your money. Most have the ability to protect your portfolio, either by moving to cash when the walls come crashing down, or by using shorts and leveraging tactics to protect you. Many of these managers actually earn money when the market declines. The goal of the absolute return manager is to achieve a positive return, and to avoid losses in the bad years.
Which of these two sounds best to you? Do you know which kind you have?
Virtue Capital Management
I am pleased to be associated with Virtue Capital Management located in Nashville Tenessee. VCM has built a platform with a number of absolute return fund managers, as well as relative. This allows us to construct a portfolio that more closely matches the investors tolerance for loss.
These funds must meet certain criteria to make it onto the VCM platform, and I believe that when it comes to tactical investing these managers are "investment grade."
How have they done? Virtue Capital Management is one of the fastest growing investment firms in the country, and for good reason.
If you'd like to see some specific returns give me a shout. I'd love to be able to share our managers results with you. I believe you'll be as impressed as I am.
Until next time,
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The S&P 500 index is designed to be a broad based unmanaged leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe or representative of the equity market in general. This index does not reflect the deduction of any fees. It is not available for direct investment. Exposure to an asset class represented by an index is available through investable instruments based on that index.