Late cycle: don't be a 'deer in the headlights'

Industry insider on benefits of active approach and the risks of false confidence

Late cycle: don't be a 'deer in the headlights'

Advisors have been told not to be frozen with indecision during the late stages of this expansion phase and take an active approach.

Brent Joyce, chief investment strategist at GLC Asset Management Group, said this can leave investors caught like a “deer in the headlights” and chasing historical returns when adhering to the basic tenets of portfolio diversification will stand you in better stead for changing market conditions and volatility.

In the second part of his look at the four common late-cycle mistakes investors make, we focus on the benefits of active management and how good returns can lead to a false sense of confidence.

Being lured into complacency with volatile investment results can mean investors being led by sentiment. Advisors, said Joyce, need to take the bull by the horns and drum home some hard truths to their clients.

He said: “Risk tolerance, like all emotions, is different at varying times in our lives and is often dependent on our most recent experiences. Because the market has had such a strong and lengthy run, many investors may believe they have a greater tolerance for risk than they actually do.”

He added that helping clients periodically re-assess their risk tolerance is a key way advisors can demonstrate value by highlighting long-term rates of return from capital markets to ensure realistic returns and volatility expectations are set. Joyce said that overlaying those expectations with the individual’s own time horizons and sensitivity to losses will help determine the best neutral asset mix for them.

He said: “Advisors who help their clients to re-adjust their portfolios today have the opportunity to help their clients retain potential for investment gains should the bull market run longer and still be well-positioned if market volatility continues and/or we see a pullback and price consolidation. The good thing is it’s not too late to take these steps.”

Joyce believes another trap investors may fall into is an over-reliance on passive strategies, which have served them so well during low volatility, upward trending markets.

He said that in down markets, passive investments offer no control, stop-gap or interventions to prevent investors from bearing the full brunt of market correction pain, while in sideways markets, passive ETF products and index funds don't allow you to select “good” over “bad” investments.

This, said Joyce, provides active managers with an opportunity to shine.

He said: “Active managers have the opportunity to take advantage of volatility to buy good stocks at attractive valuations and take profits in stocks as they rise - generating alpha or excess return in financial speak.

“Active management brings expertise, contrarian views, the ability to exercise patience and/or take advantage of opportunities through active decision-making that can translate into real value through better returns and/or a smoother ride. These are benefits we see as well worth it for the current market conditions and outlook.”