Retail investors are taking some bets that look a lot like gambling. Lauren and Robert take a step back to discuss tactical allocation and stock picking – is it a winning strategy or a fool’s game?
Retail investors are taking some bets that look a lot like gambling. Lauren and Robert take a step back to discuss tactical allocation and stock picking – is it a winning strategy or a fool’s game?
INTRO
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A collective group of internet vigilantes have been driving some big market moves, and other investors want a piece , but is this a way to build long term wealth? Here’s what matters.
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LAUREN: Live from our respective coronavirus social distancing outposts, I’m Lauren Goodwin.
ROBERT SERENBETZ: And I’m Robert Serenbetz
LAUREN: and this is Market Matters from New York Life Investments.
ROBERT: In this podcast, we the strategists at New York Life Investments will share insights from the Multi Asset Solutions team: what we think matters as we manage investment solutions.
LAUREN: That includes Mainstays’ diversified portfolio series, including the Income Builder fund, as well as bespoke solutions for our partners.
ROBERT: By sharing perspectives and engaging with you – our listeners – we can all become better investors.
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NEWSROOM
LAUREN: Welcome everybody, it’s the week of February 1, 2021, and today we are going to take a step back and discuss tactical trading.
ROBERT: Ahh tactical trading, when an investor moves money from one area of the portfolio to another – taking an over- or under-weight positions relative to its strategic benchmark.
LAUREN: Exactly, if we were to say we are “overweight equities relative to our strategic portfolio”, that is a tactical allocation decision.
ROBERT: Yes, and the strategic portfolio is just the blend of assets an investor has to achieve a goal. Like 60% stocks and 40% Bonds
LAUREN: Exactly
ROBERT: And recently there have been a flurry of headlines of newer investors who are treating stocks more like a spin at the roulette wheel than a long-term strategy to build wealth.
LAUREN: Yes, but this actually goes beyond the new soap opera drama between internet trolls and institutional hedge funds –
ROBERT: how so?
LAUREN: It can be easy (and fun) to get caught up in the drama, but there are a couple of things I’d point out about this dynamic. First of all, the current meme stock dilemma is unlikely to be a good investment thesis for meeting your financial goals. But second of all, it raises a point that actually is really interesting for investors and advisors, which is: when you have a view on the near term – let’s say you think the economy is going to improve this year, but that’s only one year in your 20 year plan – how do you express that view?
Robert, I know you’ve done a lot of great work on this, so I’d love for you to walk us through your framework for thinking about tactical investing.
ROBERT: Of course and just for you, Ill have three things here:
1. Risk
2. Diversification
3. Breadth Hit ratio (or Batting average for our sports inclined listeners)
LAUREN: I’m so proud of your three things. Haha! Seriously, this is great, what do you mean by risk?
ROBERT: Well this is key to investing – getting your overall risk right. That is really what drives your gains at the end of the day. No risk, no return. Lots of risk, lots of potential return, but also lots of potential downside. So when we make a tactical bet we have to keep in mind how much risk that’s adding. For example: a 10% overweight equity can contribute as much as 2.6% of over or under-performance relative to the original benchmark.
LAUREN: That is potentially a lot of extra risk over time. So a proper portfolio manager, when they size their tactical bets, will think about how much risk that adds compared to their highest conviction trade.
ROBERT: Right and you have to know when to get in and when to get out.
LAUREN: you also have to know what strategy region asset or company to over or underweight. I assume that leads us to you second point. Diversification.
ROBERT: yup
LAUREN: Essentially you don’t want to put all your eggs in one basket. Often there are many sectors or companies that will over-perform at one time.
ROBERT: Which brings us back to the third point breadth of investment choices.
LAUREN: We have talked about this before on the podcast. It is the number of investment decisions that you can make. All else equal the more investment levers someone can pull the more likely they are to find things that work.
ROBERT: Exactly – think about it this way: If you have a 300-batting average you don’t just want to get one opportunity at bat. You want a lot of opportunities. That will give you the best chance of hitting the ball a third of the time!
LAUREN: Exactly: That’s a lot to think about. What are the takeaways here for investors?
ROBERT: Well based on this view one might assume that we don’t believe in tactical bets. However, we do believe that both active management and tactical bets can add value over the long term for investors.
LAUREN: Right but the devil is the details. In our own management of funds, we try to align on long term opportunities based on valuations, sentiment, momentum, and the economic cycle. indicators over the long term that help us identify the right exposure and time that exposure both getting in and getting out.
ROBERT: Ya and building wealth takes time. You have to be disciplined and consistent. Not pulling the trigger on a single bet.
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PORTFOLIO PAUSE
LAUREN: That’s a great moment to transition to our portfolio pause, a segment of the podcast where we discuss an investment idea. And whenever we are talking about building long term wealth we have to talk about proper portfolio construction and diversification.
ROBERT: That’s exactly right. Yes, that means having the right blend of stocks bonds across the spectrum of size, sector, and theme. You have to put it all together in a package that won’t take too many risks in either direction.
LAUREN: Sometimes really low risk assets like treasuries do well. Other times companies with high potential profit growth do well. And other time, companies that were long considered down and out recover. Its important that you capture all of those possibilities.
ROBERT: For a manager picking individual stocks and bonds its important that they have good diversification and risk control in place as well. Having outsized positions can destroy wealth just as easy as it can gain wealth. And at the end of the day, a smart investor can find many companies with proven business models and good cash flows, who reinvest those cash flows in growing the business or returning cash to shareholders.
Music fades out.
COMING UP NEXT:
LAUREN: Can I just say that my favorite internet trend of last week was Janet Yellen’s foray into social media?
ROBERT: Its earnings season. Next week the bulk of S&P{ 500 companies will report earnings. The Street has generally underestimated the revenue recovery rate. cyclical recoveries in the past have shown strong revenue recovery and a slightly more modest expansion of operating earnings. The degree sales and profits expand will be critical to the bull thesis.
SIGNOFF:
That’s it for today. We’ll be back next week for more Market Matters.
Let us know what matters to you.
If you have a question or topic of interest, reach out to us on social media.
That’s right. You can send us your questions or highlight what matters to you by finding us on LinkedIn. You can also follow our views on our *new* website at newyorklifeinvestments.com and clicking “insights”. Until then, I’m Robert Serenbetz.
And I’m Lauren Goodwin. See you next time.
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Our podcast is produced by Milo Ben Amotz, and our music was composed by Zach Young.
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