Joe was elected, several vaccines are viable, and the order returned to the world (or so we thought). The tsunami of liquidity unleashed by central bankers and governments not to mention Millennial ‘Robinhood’ traders sent the markets new, albeit extremely choppy heights.
These days investing in financial markets (and the term is not used loosely – bonds Gold others have done well) is akin to European traders using stormy monsoon seas to chart a much faster route to India. Our intrepid investors are riding that tiger wondering ‘what next’?
Most advisors will recommend sticking to allocation, yet others will punt ‘Pharma’ or ‘IT’ stock baskets/funds/ETFs oscillating between ‘the worst is over’ to ‘the party is just beginning’, making investors even more nervous.
Perhaps the answer lies in the above or, rather, how can we take advantage of the current liquidity/volatility, book profits, and yet ensure their child’s college fund /down payment on that new apartment is not destroyed. To do that we need to divide our portfolio into two parts - one which is for long term savings, where the bulk of the investments lie, The core.
The Core: These are time tested principles of allocating assets and then holding onto those allocations. Rebalancing (resetting component weights) has the added benefit of constantly booking profits and buying individual components (ideally ETFs) at low prices. This way not only does the investor manage to eke out alpha, but risk also remains constant.
Should an investor want moving or declining risk (e.g. a retirement portfolio or a Target Date basket for buying a house or for a child’s education), it is also quite efficient and cheaper to do that using the asset allocation plus periodic rebalancing approach with ETFs as preferred instruments?
The second part is short term or tactical investing (Tactic: 1620s, “science of arranging military forces for combat,” from Modern Latin tactic (17c.) or a conceptual action or short series of actions with the aim of achieving a short-term goal.)
The Tactical portfolio: Typical assets are into sectoral or thematic indices (Sectors like IT or Pharma and themes like a basket of companies likely to do well in the Covid or post-Covid scenario). While the best way to do this is to look at passive investments like ETFs or other passive baskets, investors may also take short-term exposures to, for example, Midcap ETFs, Foreign Equity, or in some cased Focused and Disciplined Alpha Strategies.
However, there need to be some words of caution for investors and advisors alike i.e. Always develop a disciplined framework to manage the interaction between investments – you cannot have two tactical investments that are highly negatively correlated so the gain in one gets wiped out with a loss in the 0ther. As most tactical allocations have two main purposes: alpha enhancement and volatility reduction, these must also always be complementary to the core.
While alternative, sectoral, and thematic strategies are designed to have distinctive risk levels to mirror the risk parameters of our core portfolios, it is important to first evaluate and determine the optimal implementation strategies i.e. what to buy when, how much, and most importantly, when to exit.
So, what can we expect from this Core + Tactical allocation? Firstly, Better-than-average performance with limited volatility & cost with flexible packaging. Advisors can get portfolios tailored specifically to each client’s need and Advisor driven intermediate objectives are possible without altering portfolio risk attributes.
However, it is important to do your homework or use a SEBI registered advisor/platform to assist with such a portfolio.