Blended investment strategies: Planning for days in the sun and days in the shade

At CWM, we believe in managing risk mindfully based on clients’ specific needs. That’s why we employ a host of investment strategies with the power to help clients achieve their idea of living richly, recognizing no singular strategy is best at all times, for all goals, or in all market conditions.

In short, every investment strategy has its day in the sun and its day in the shade. What's more, you don't have to commit to just one strategy.

With that in mind, we want to highlight the attributes of CWM’s investment strategies – risk-adjusted and our more traditional wealth accumulation models – and when they may make the most sense to deploy.

Risk-Adjusted and Traditional Wealth Accumulation Investment Strategies

CWM’s risk-adjusted portfolios, what we sometimes playfully refer to as our Moneyball approach to investing, are actively managed based on identified risk and opportunities in the market, with an emphasis on downside protection and account longevity. This strategy aims to avoid large losses that require significant market gains to recover. For example, did you know that if your portfolio loses 10%, you need to secure an 11.1% return to get back to neutral? A 20% loss requires a 25% return to recover – and a 40% loss requires a whopping 66.67%.

Phase of life also plays a critical role here. The saying is that the market goes down like an elevator, and up like an escalator. For investors who have time and future earnings to allow their portfolio to recover, a loss may feel less significant. But for those who plan to use their funds in the nearer term for a major purchase or transition to retirement, a poorly timed loss can be devastating. These investors may benefit from a risk-adjusted vs. a more mainstream buy-and-hold strategy.

The risk-adjusted approach typically shines in highly volatile and/or down markets – think 2020. Our research indicates that this investment strategy may outperform other approaches over the long term.

Our risk-adjusted portfolios include Exchange Traded Funds (ETFs) and mutual funds, and we work to actively manage and adjust risk exposure. (Learn more here about beta, the metric we use to measure and adjust risk compared to market performance.) In risk-adjusted models, investment managers will adjust the beta up or down based on a variety of market indicators. Overall, these portfolios typically have a beta lower than 1, which means they may not keep pace with large market increases, but also shouldn’t take the same hit when markets are down. A major benefit of the risk-adjusted models is that they can limit downside volatility during times of turmoil while providing market-like returns over the long run. Individuals with a limited capacity to easily replace investment losses (i.e. retirees with a fixed income) may find the risk-adjusted approach more psychologically comfortable.

In contrast, our wealth accumulation portfolios are static and entirely invested in lower cost Exchange Traded Funds (ETFs). They operate with a risk profile that more closely mirrors their respective market benchmark; in the parlance of the beta metric, this more traditional passive-style investment strategy remains highly correlated to the S&P 500 stock index or the targeted comparable benchmark, regardless of economic or other data.

Our traditional wealth accumulation investment strategy typically shines when markets are up. In some environments, this approach can dramatically outperform risk-adjusted strategies, especially if risk-adjusted models are positioned more defensively when market action continues higher.

Let’s compare the previous two years: 2020’s market performance showed the weakness of a typical static buy-and-hold investment strategy; mainstream investors felt the heat when markets were down while declines for CWM risk-adjusted clients were a fraction of what the market experienced during the worst of the COVID sell-off. The risk-adjusted models were also able to pivot into a more aggressive stance, when valuation and other data measures improved near the market lows, while traditional buy-and-hold models experienced the ups and downs of the roller coaster ride that was 2020. However, as markets remained positive in 2021, CWM’s traditional wealth accumulation models outperformed the risk-adjusted models which became defensive in response to changes in market data. Just two months into 2022, amidst market decline, our risk-adjusted models are outperforming the traditional wealth accumulation models, but time will tell.

The perks of a blended strategy

Deciding between these two approaches really comes down to your timing for withdrawal and appetite for risk – and it doesn't have to be an either/or scenario. Depending on your circumstances and your goals, you might use both risk-adjusted and traditional wealth accumulation strategies in different segments of your portfolio or at different times. We call this a blended strategy.

Let’s understand this more deeply using hypotheticals:

Layla is a 70-year-old woman who has been retired for 15 years. She is in the distribution phase of the portfolio lifecycle, meaning she lives off her investments and is not likely to re-join the workforce. To her, avoiding large losses is more important than achieving big returns. A risk-adjusted approach for her entire portfolio may make the most sense in her case.

Now let’s think about a married couple, Roger and Linda, ages 42 and 43. They have 16 to 17 years until they can withdraw from their IRAs without penalty, so they have a fairly long horizon on their retirement accounts. They choose a traditional wealth accumulation model for their retirement accounts, with the goal of pursuing larger gains for now, recognizing they have time to recover from potential losses. They also have a separate segment of their portfolio that they want to be able to access quickly, which we call an emergencies and opportunities fund. Roger and Linda have earmarked a portion of this for a down payment on a second home, using the remainder to build up long-term savings and to cover any unexpected expenses, whenever they may arise. A risk-adjusted model, reflecting the preservation phase, might be most appropriate best for these funds since they could end up in a place where they are having to take funds out in a down market.

And finally let’s look at 26-year-old Tim, who is just starting his career as a software engineer and is considered to be in the accumulation phase. He has decades ahead of him to keep earning and weather losses, and he’s comfortable with the risk and volatility inherent in pursuing greater upside potential. He chooses a traditional wealth accumulation model for his retirement portfolio. When markets are up, his wealth grows. When markets are down, he continues to invest, thus, buying more shares at a lower price, knowing time is on his side.

Get in touch

Do you see yourself in one of the above scenarios? Are you curious if you may benefit from a blended investment strategy? Give us a call at (425) 778-6160 or get in touch through our contact form. We’re always happy to help you refine your portfolio to match your circumstances and goals.

Disclosures: The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.