Many investors adhere to a long-term, buy-and-hold investment to grow wealth over time, but there are drawdowns to being too passive with their portfolios. Exchange traded fund investors, though, may consider an alternative strategy to improve their risk-adjusted returns over the long haul.
On the recent webcast (available On Demand for CE Credit), Improve the Traditional Buy-and-Hold Strategy, Stephen Blumenthal, Chief Investment Officer and Chief Executive Officer of CMG Capital Management Group, argued that there may be room to improve long-term equity investing by limiting downside risk. Historically, there have been secular bull markets 54% of time since the early 1900s, which has left investment portfolios to periods of downturns that could eat away at total returns.
“A rules-based tactical equity allocation strategy may help manage risk and could potentially limit losses from downturns,” Blumenthal said.
If an investor followed a traditional buy-and-hold strategy, one would require larger gains to break even after a loss. For example, a 50% drop in a position would require a 100% gain to fully recover from the loss. Riding out a drop can mean many months of declining value and purchasing power.
“Managing the risk of deep and extended periods of loss is critical for long-term success and peace of mind,” Blumenthal said. “Avoiding loss could help increase market participation by potentially reducing the amount needed to recoup.”
In an attempt to manage market risks, investors may follow various tactical allocation strategies to limit short-term turns. Robert Schuster, Senior Director of Ned Davis Research, pointed out that those actively seeking to improve risk-adjusted returns by opportunistically reallocating a portfolio may consider options like long/short hedges, downside hedging strategies, low=volatility plays or tactical long/flat strategies.
For example, Ned Davis Research produces a market breadth composite of the various S&P 500 segments to analyze each industry’s price level returns, which utilizes multiple technical indicators applied to industries to measure trends, countertrends, and market health. Finally, allocations to specific areas are based on both the composite’s score of market health and the score’s directional trend. The final product is a an investment strategy that has diminished drawdowns during weak periods but it was still able to participate in any upside potential to generate improved long-term, risk-adjusted returns.
“Index provides tactical U.S. equity allocations, and has historically outperformed with less risk,” Schuster said. “Trading into and out of the market tactically has helped improve the risk/return trade off.”
To potentially improve long-term equity investment, investors can look to something like the VanEck Vectors NDR CMG Long/Flat Allocation ETF (NYSEArca: LFEQ). LFEQ can provide investors with an investment solution that offers a systematic approach to preserve capital by increasing cash when market health is weak while participating in uptrends with a full allocation to equity through technical indicators.
The ETF strategy tries to reflect the performance of the Ned Davis Research CMG US Large Cap Long/Flat Index, which follows trade signals that dictates the portfolio’s equity allocation ranging from 100% fully invested or “long” S&P 500 exposure to 100% in cash or “flat” Solactive 13-week U.S. T-Bills.
“LFEQ is designed to efficiently trade into and out of the market automatically for its investors so they do not have to,” Schuster said. “Seeks to track the Index and provide tactical U.S. equity allocations to perform with less drawdown risk.”
Financial advisors who are interested in learning more about a long-term investing strategy can watch the webcast here on demand.