Active Investing

Active Management in Your Portfolio

In this episode of Your Wealth Curve I sit down with Andrew Hanlon of Hanlon Investment Management to talk about active, or tactical, asset management as part of the investor’s portfolio. Hanlon, located in Egg Harbor Township, N.J., was founded in 1999 and currently manages about $4.4 billion of assets. Andy’s brother Sean Hanlon, after working in the investment industry since 1982, started to see a need for professional money management to serve the investing public, which prompted him to make a change in his career and start Hanlon in the late 90s. Andy joined Hanlon in sales after working in the market as a trader on the exchange floor.

Both Andy and Sean recognized the shift at this time from a world where our retirement money would come from our workplace pensions or other retirement fund, or a “defined benefit society,” to the world we live in now, where we are responsible for our own financial future, or a “defined contribution society.” With their retirement now in their own hands, Sean realized how important it was when helping investors manage their money to mitigate risk and protect their portfolios from major losses. Hence the “tactical” trading strategy was born and implemented at Hanlon to avoid investors being solely at the mercy of the volatile markets in a traditional “buy and hold” strategy.

What is active, or tactical, investing?

Tactical management is a method used to mitigate portfolio risk by controlling the amount invested in each asset class based upon its historical volatility and analysis of market data on any given day. At Hanlon, they are examining market data on a daily basis to decide how the money in their funds will be allocated, or if they need to move to cash. When asked to describe the theory behind tactical management, Andy likens a down market to a sinking ship.  “When the ship is going down, it’s not just about rearranging the deck chairs. Sometimes you need to tactically get off the ship.”

A perfect example of this would be a few weeks ago, when analyzing market data, Hanlon noticed a red light going off in emerging markets. Hanlon saw the warning signs and reallocated those funds to a different asset class. A few weeks later, emerging markets collapsed and thanks to this tactical movement, Hanlon investors were saved from greater losses. Andy stresses that tactical management should be only part of a larger comprehensive wealth plan. He adds that because the tactical element of your portfolio addresses drawdown risk, it frees the investor up to take some greater risks in other areas of your portfolio.

Tactical Management in a Defined Contribution Society

In the late 1990s, companies started freezing pensions and limiting contributions to retirement plans, ultimately stopping them all together in some cases. This created a shift to the world we live in now, a defined contribution society, where we are responsible for funding our own retirement accounts. This affected Andy very personally, since society during his work life has shifted from defined contribution to defined benefit. “My entire young adult life was predicated on me having a pension that was being funded and matched tremendously,” says Andy regarding the financial decisions he made. Things like buying a second home, vacations and schooling for his kids were all decided upon knowing that his retirement account was being funded by his employer.

Andy falls within the 46 to 64 year age group, which according to him is the most vulnerable in terms of hitting or not hitting their retirement goals. Under the age of 46, you are prepared to be responsible for your retirement because you have not known it any other way. Older, you probably have a pension. But within that age group, you have had that pension plan, which is probably now depleted or gone, and you are now charged with making enough money for your retirement, which is coming in a relatively short amount of time. People who fall within this age range are now goals-based investors, as opposed to benchmark-based investors, with the goal being having enough money to live on after you reach retirement age, which will happen in a finite amount of time. This is where the shift to tactical management, versus a passive approach, comes into play, based on the volatility of the markets today and the number of people nearing retirement.

Tactical Vs. Passive

A passive strategy, or a “buy and hold” approach, has long been seen as the predominant strategy in the overall wealth plan for long-term investors. The problem with this approach now, says Andy, is that you are “timing the market” based on when you were born. “Let’s say I’m passively invested and have been since I was 36,” he says. “In those 14 years I’m in the S&P and it is basically unchanged. So the only thing I have to show for it is an ulcer.” Andy says by following the buy and hold approach, you are timing the market by assuming it will be higher by the time you retire. Over a long period of time, passive investment strategy says that the markets will end up higher, so long as you stay the course. Typically your portfolio would start out more equities based, which would be riskier, and then turn more bond heavy in the later years to mitigate risk. Andy says this theory is now being put to the test because of the looming challenges in the bonds markets with interest rates being so low with only one way to go. This makes having an active bond portfolio mandatory when your retirement horizon is looming, Andy says, as opposed to a passive bond portfolio or getting into equities, which at this point in your wealth curve is too risky. Hanlon’s bond funds are tactically managed and are composed of mutual funds with a large pool of bonds to cut down on the risk of default.

Tactical Management as Part of your Independent Financial Advocate’s Plan

Andy admits that tactical management is only right for a portion of your money in an overall wealth plan. That is why Andy thinks one of the most important decisions we can make as an investor is to have a financial planner, or an independent financial advocate as he calls it, help you determine how much of your money should go where. Hanlon follows a modern portfolio theory, which states that rather than populating your life with lots of different asset classes using diversification as the only risk reduction tool, you should be exposed to a variety of investment solutions that address drawdown risk. Your financial advocate can expose you to a number of different investment vehicles in an unbiased way and help you to determine what part of your portfolio will be risk reduced depending on your goals. This will then free you up to make riskier moves elsewhere with a higher degree of comfort.

Another key role your financial planner can play is protector of your wealth against emotional decisions people tend to make in a down, or up, market. In a down market, fear can lead people to get out of things too soon, which often times leads them to greater losses in the end. “Fear is the darkroom where negatives are developed,” Andy says.  Having a portion of your money tactically allocated can help control rash emotional decisions because as the investor, you can see the defensive moves driven by real factors that are being taken to protect your wealth. And in an up market, your financial advocate can remind you of these defensive moves you took when you are looking for greater returns. In the end, Andy says, the amount of money not lost is more important than the percentage of money you made.

Andy stresses the importance of allowing your independent advocate to assess your personal situation and your retirement goals and instruct you as to where you should have your money. “That’s why you need an independent financial advocate,” Andy says. “To tell you how much Hanlon you need.”

This communication strictly intended for individuals residing in the states of CA, CO, CT, DC, DE, FL, GA, IL, LA, MA, ME, NC, NH, NJ, NM, NY, OH, PA, RI, SC, TX, UT, VA. No offers may be made or accepted from any resident outside these states due to various regulations and registration requirements regarding investment products and services. Investments are not FDIC- or NCUA-insured, are not guaranteed by a bank/financial institution, and are subject to risks, including possible loss of the principal invested. Fixed Insurance products and services offered through Ash Brokerage or Smallwood Associates, Ltd. Fixed Annuities are long-term insurance products. Before you purchase, be sure to talk to your financial professional about the annuity’s features, benefits, and fees and whether the annuity is appropriate for you, based on your financial situation and objectives. All guarantees are based on the continued claims paying ability of the issuing company. Investment Advisory Services provided by Smallwood Wealth Management, LLC, an SEC registered investment advisor. Headquartered at 199 Broad Street, Red Bank, NJ 07701-2056.
Securities offered through Purshe Kaplan Sterling Investments, Member FINRA/SIPC Headquartered at 18 Corporate Woods Blvd., Albany, NY 12211.
Purshe Kaplan Sterling Investments and Smallwood Wealth Management are not affiliated companies.
NOT FDIC INSURED. NOT BANK GUARANTEED. MAY LOSE VALUE, INCLUDING LOSS OF PRINCIPAL. NOT INSURED BY ANY STATE OR FEDERAL AGENCY.

 

%d bloggers like this: