There is an old saying that says, "It's not about timing the market, but about time in the market." That adage has been used for decades in the finance industry to advocate for passive investing strategies and minimise the number of recommendations to shift personal assets in one's portfolio. Conveniently, it makes one's job much easier!
In defence of that strand, you will hear this broken record of the performance loss from investing strategies that miss out on the best day returns. Just google "S&P returns by missing out on the 10 best day returns" and an infinite amount of analysis will show how damaging that is for your returns.
My own beliefs lie elsewhere, and I shared some comments on LinkedIn recently in a discussion with @Stephane Renevier from Finimize, who happens to share a similar view to mine. He published an interesting post on the topic.
Active vs passive strategies: weighing the arguments
The above table clearly shows that the old adage is indeed old and that it is now increasingly efficient to take a much more active approach to managing wealth.
The notion that a buy and hold strategy is efficient because it guarantees never missing the best days is akin to saying that you should always stay out to never miss sunny days.
Predictive analytics that focus on reducing the chance of catastrophic losses
Old-fashioned risk management technology is basically agnostic on the future and has a frustrating habit of reducing the weight of the assets that performed very well in good times. The logic is simple, the higher the return, the higher the risk. A good old management toolkit will simply reduce the exposure to those assets that tend to be most volatile.
This is frustrating in the world of retail investing which is typically made up of portfolios that are typically deemed risky as they have large exposures to equity and now increasingly to crypto. The outcome - from a user experience - of having a traditional optimizer applied to those portfolios is a massive reduction in returns for not much benefit in drawdown reductions.
There is no way around the need to use predictive tools to provide an edge. This is harder work for sure but it is worth it.
There are many ways to go about it.
At InvestAlert, we build tools that help avoid those severe and protracted drawdowns that make the recovery to break even so tricky.
Here is a quick reminder of how painful that can be:
Our approach is grounded in fundamentals, which tend to be persistent and in synch with asset returns over multi-month periods. Think of them as your medium-term cyclical fluctuations that explain so much of the systematic risk in portfolios.
The charts below provide some examples of early detections of drawdowns in the S&P and Bitcoin that we have developed and implemented as risk management tools. In this case, the strategy is simply turning into cash when the early warnings are triggered and regaining total exposure to the asset when the warnings are gone.
S&P B&H vs InvestAlert Portfolio Copilot™: Invest 100 dollars in January 2007. Shaded areas show times of risk reductions
Bitcoin B&H vs InvestAlert Portfolio Copilot™: Invest 100 dollars in January 2019 Shaded areas show times of risk reductions
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