Why Goals-Based Investing Deserves Your Attention

Traditional investing strategies have run their course and have become obsolete and risky. They have also become more and more commoditized, which means that advisors need to look beyond conventional methods of portfolio creation and management, such as long-only equity portfolios and modern portfolio theory, and start thinking outside the box. That was the position taken by Bob Rice, the chief investment strategist at Tangent Capital, while giving the keynote talk at a recent InvestmentNews Alternative Investments conference.

As reported in InvestmentNews, Rice made a series of statements on the perils of clinging to past methods of portfolio management that worked in a different domestic and global economy than the one we have now. Rice’s view of the future of the equity and fixed income markets is decidedly pessimistic, which he voiced long and loud in his speech. (For related reading, see: Is Active Management Making a Comeback?) 

“You've got to start thinking about goals-based investing; that's the way you're going to fight back against the robos and leave your competitors in the dust,” he said. “Modern portfolio theory is a sandbox in the middle of a desert. As human beings, we like simple truths, but all good ideas have a shelf life, and the 60-40 model had a good run. I think we really are at an inflection point, and quality advice is going to matter a helluva lot more in the next five years than it did over the last five years. We are seeing massive chunks of global credit markets trade at negative rates, and we're just getting warmed up.”

Rice also commented on the growing correlation between the stock and bond markets, and how advisors and robo-services need to be prepared to absorb some substantial losses as a result. He also drew a contrast between the Federal Reserve, which is winding down its policy of stimulus spending, and the rest of the global markets and banks, which are attempting to stimulate economic growth using any means possible. (For related reading, see: What Advisors Need to Know About Cross-Selling.)

“People are going to wake up and realize that bonds are not always safe,” he said. “It's kind of amazing what's going on out there, and this isn't going to stop anytime soon. Just because the Fed is backing off doesn't change global banking policy, so you might want to look overseas for your investments because the easy money is still supporting those markets. The Fed is making their best guesses, but they really have no idea what to do. Right now the level of uncertainty on this planet is huge. That's why we have to prepare for multiple futures and we have to go to a radically more diversified portfolio approach.”

Rice closed his remarks by admonishing advisors to consider taking an alternative approach to portfolio management that could increase performance over time. But he emphasized even more that a defensive approach to diversification is necessary, and those who invest solely in passively-managed index funds will be vulnerable to larger losses.

“The point of passive investing is to be average for cheap, and in this kind of a world averages are for suckers,” he said. “Passive outperforms active when the market is up and (price-to-earnings ratios) are expanding, but it underperforms in every other market scenario.”

Although Rice’s approach to portfolio construction and management may be unconventional in some ways, advisors need to be willing to make changes in their management styles and other business practices in order to stay current and relevant for their clients. The points that Rice made in his speech are solidly grounded in reality, and time will tell how his predictions pan out. (For related reading, see: Does a Trump Presidency Signal a Buying Opportunity?)