Those who want capital preservation sleep with cash deposits held in behemoth banks and sigh with relief at every equity crash reported in the headline news. The good time to acquire risk assets is when prices are down, yet there is always a reason why they are so cheap and could get cheaper: who wants to catch a falling knife?
Even more dangerous, the temptation to speculate, to give in, to buy assets when the markets have been rocketing, often is greatest just before the peaks.
Just when the bull arguments for buying seem overwhelming, market tops may be forming and a bear slide about to get underway.
Some investors stay invested and run their portfolios. They rotate sector to sector, pile into what should be great companies or great investment offerings.
They are always in the market, but shift asset classes and securities according to information, or instincts they possess.
Others simply leave the decisions to their wealth managers. They trust the professionals to align a client’s investments to that individual profile of expected returns and risk.
A few investors do it themselves with personal accounts that hold low-cost exchange traded funds and fixed income securities in long-term, fixed allocations that may be stable enough to suit their needs.
Important studies of world-wide investment returns for the past 25, 50 and 75 years make the case that 75 per cent of investors’ returns come from their portfolio’s overall risk level.
This suggests that capital preservation with cash deposits will risk little and return little; hence the adage that cash income equals zero after inflation and tax.
The studies also show that 15 per cent of investors’ returns come from their portfolio’s asset classes, so that investors who rotate from sector to sector, or from gold to shares to commodities, are influencing only about one-sixth of their long-haul returns.
Security or manager selection affects 5 per cent of returns; and this is about the one-twentieth share of managers who outperform the market indices over a decade.
The last 5 per cent is random, apparently. All in all, investors may ask that wealth managers demonstrate expertise in addressing the 90 per cent of returns that come from targeting overall risk and asset class allocation.
Dynamic, rather than fixed investment processes, may be part of the answer for long-term investing.
John Ricciardi is chief executive of Kestrel Investment Partners. The views expressed here are his own.