Sailing vs. Rowing

Think about this:  Let’s assume you have two boats: a rowboat with two good oars, and a sailboat with a great sail.  You head out to a lake where the wind is always blowing from the North.  The wind usually picks up around 11:00AM and remains strong and steady till sundown.  It is obvious that you would bring your sailboat to this lake to enjoy the natural power Mother Nature has provided.

A couple weeks later, you find yourself up on a pristine mountain lake fed by several gentle streams.  The setting is tranquil, silent, and the water looks like glass (no wind).  In this situation, your row boat would be the perfect vessel to muscle across the lake.  Awe, the peace and serenity this day brings!

So what do winds, water, and navigation have to do with investing?  A lot, actually!  I recently attended a 2-day workshop with money managers and advisors from JP Morgan, Goldman Sachs, State Street, Genworth Financial, and many more top tier firms.  While these companies excel in managing money, they all have different approaches to achieving their objectives and provide substantial evidence supporting their style.  In summation, they were either taking a ‘sailing’ or ‘rowing’ approach to portfolio management.

The sailing approach to management of assets is one that rides the ebbs and flows of the market in general.  During good times (which is the vast majority of the last 100+ years), these ‘strategic’ and ‘tactical constrained’ model managers use the upward momentum (sailing) of the market to capitalize on growth.  During downward trending markets, these managers might moderately shift their investment allocation towards a defensive portfolio.  However, your investment will typically remain invested in the market rather than pulling out and making a big tactical change.

The rowing approach, by contrast, uses technical indicators and absolute return strategies to attempt to make money (or at least preserve it) in up, down, or flat markets.  This strategy could be useful when markets are in a volatile and/or unpredictable phase or cycle since the manager has full discretion to change the asset allocation at any time.  However, making drastic changes predicated on trends could produce a double edged sword when things don’t go as planned.

So which approach is right for you?  It all depends on your overall financial situation, but I believe some combination of the two affords the investor better diversification.  The primary purpose of constructing a well diversified portfolio is to take advantage of the “winds” that can easily push (sailing) your portfolio forward, and to be able to muscle (rowing) your way upstream when everything else seems to be falling apart.  This, my friends, is the ultimate attempt to reduce volatility.  And that is something we can all strive for with a customized portfolio.

Call me to learn of new investments and strategies available for your specific situation!  I might even teach you a few sailing tactics while we’re at it.