When it comes to choosing funds to invest your money, there are virtually infinite possibilities in the market. At GWS, our Investment Committee has meticulously whittled down our approach to just a handful of strategies that we find most effective for our clients.
Think of our investment strategies like a menu. As the client, you can order whatever you like. But, as a good server, we’re going to recommend specific strategies to you based on your preferences, lifestyle, goals, and financial plan. So, even though the pasta special is award-winning, a chicken and vegetable dish might be more aligned with your health goals and palate!
Ultimately, the decision is yours, but the onus is on us to educate you on what strategy likely aligns better with your goals and financial plan.
High Risk, High Reward? The Role of Beta in the Market
Have you ever heard the phrase, “High risk, high reward?” That quip references beta or risk. Beta measures a portfolio’s volatility relative to its benchmark. A beta greater than one suggests the portfolio has historically been more volatile than its benchmark. Conversely, a beta less than one indicates the portfolio has historically been less volatile than its benchmark.
So, let’s say you have a beta of 2 or double the market. If the market goes up 10%, you go up 20%. 1 But if the market goes down 10%, you’ll also go down 20%. That’s where the idea of “high risk, high reward” comes from.
In general, the amount of risk you take should be correlated to the length of your time horizon or when you’ll need the money. For example, if you’re 30 years old and investing in your retirement, you have a long-time horizon and can take on more risk. On the other hand, if you’re 30 and investing money you’d like to use to purchase a home in the next five years, you have a short time horizon. Therefore, you would want to invest in a strategy that posed less risk.
Unpacking Investment Strategies
Read on for a description of our investment strategies and how to determine which is best for you. We are entirely agnostic to these strategies, meaning we don’t favor one over the other. For a deeper dive into each, feel free to reach out to me or any member of our investment committee.
Not yet a client of ours? Then, select “Request a Meeting” in the upper right-hand corner of the page, and we’d be happy to connect with you.
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Strategy #1: Builder Works Well For Early Investors; Wealth Accumulators
This strategy is all about the long game. It is most appropriate for people with a long-time horizon who can get compensated for bearing volatility. The Builder strategy is meant to leave benchmarks in the dust!
This is one of our flagship strategies, and even though it’s geared toward younger investors, some of our clients keep them forever and contribute to the account over time. So, if you’re an aggressive investor and want to hold forever, this could be an option for you at any age.
Strategy #2: Tax-Wise
Works Well For High Earners Who Need to Keep Their Taxes Down; People Who Generally Hate Paying Taxes
This strategy is all about keeping as much of your wealth for you (and out of taxes) as possible. To aim towards this, we are cautious with capital gains. This is because your earnings net of taxes matter. So, for example, in retirement accounts [e.g., 401(k), IRA, SEP IRA], you can trade as much as you want and never pay a capital gains tax.
But in taxable accounts, you must pay very close attention to how often you trade. For example, if you trade within 12 months, you’ll have short-term capital gains losses. However, once you hit 12 months and one day, you’ll instead be counted as a “long-term” hold from a tax perspective, which is more favorable.
Historically, we used mutual funds for this strategy, but we’ve transitioned to using nearly all ETFs. Why? A benefit of ETFs is that they reduce — or in some cases, avoid entirely — capital gains distributions. That means they’re more tax-efficient compared to similarly structured mutual funds.
ETFs can also be traded during the day, so we’re not held to a single end-of-day value. Thus, if we have to trade quickly, ETFs are much more favorable. In most cases, they also come at a lower cost (although we don’t shy away from using more expensive funds if we think we can make the client more money from a net standpoint).
We, of course, try to beat benchmarks, but that’s not the goal with this strategy – lowering taxes is. So, the performance may zig-zag much more closely to the benchmark in this approach than Builder, for example. (We call that difference a tracking error; this strategy would be considered low to medium.)
Strategy #3: Moat
Works Well For Investors that Love Individual Stocks
Maybe your parents told you fairy tales when you were little or asked them about your kids. Either way, chances are, when we say “moat,” you know exactly what we mean. Just like a moat was a small border of water around a castle intended to keep intruders out, this moat keeps competitors of high-performing stocks at bay.
The story goes that this is the analogy Benjamin Graham taught Warren Buffet when he mentored him on stock picking. “If you’re Coca-Cola, what’s your competitive advantage that keeps your competitors at bay?” That competitive advantage is the moat.
At GWS, our Investment Committee does extensive research to determine what companies have an “X-Factor” advantage to outperform their competitors continually. Our relationship with Morningstar allows us to dig deeply into stocks for these qualities, and then we add a quantitative layer of analysis over the top. Typically, this strategy aligns with our tax-wise strategy’s quantitative buy/hold timings, but not always. So instead, it’s more about specific companies who are outperforming (and suggest that they will continue to exceed).
We typically see a lot of “DIY” investors in this strategy. They like following individual stocks and tracking performance, and they tend to shy away from ETFs and Mutual Funds out of personal preference.
Strategy #4: Signal
Works Well For: Clients Who Have Rollovers, Are Approaching Retirement, or Are Retired
Some would consider this our flagship strategy. We use a time-tested approach to following quantitative indicators – a firm’s trade secret rooted in following a technical signal.
How does it work? The signal we have developed broadly pinpoints where dollars flow globally to see where we’re getting exposure. For example, last year, this strategy picked up on high-performing categories like technology and stay-at-home stocks. At the same time, it avoided types like cruises and airlines, and as a result, we had significant exposure to those categories that did well. This is a disciplined, daily trading strategy that closely follows a rules-based process and algorithm.
The driving factor behind the algorithm is momentum. We won’t catch performance perfectly at the bottom of the peak (no one can), but if we can catch it in between over and over with your holdings, you may outperform the markets. Many advisors in our firm hold their money – particularly for retirement – in this type of account. It’s a significant reason for the firm’s success.
Ultimately, an essential part of your investment strategy has the right amount in the market for the right amount of time in the market. Our Planning Committee does a great job helping you figure out exactly how much you should keep as a cash buffer, so the rest can be in the market growing and working for you. Watch this video from Chief Planning Officer Christina Shockley for more on that topic.
We discuss these strategies and themes – especially beta – each week in our Weekly Market Insights broadcast. Be sure to subscribe to our GWS YouTube channel, so you never miss an episode, and download a calendar hold here.
Note: We also have a tactical bond and qualified bond strategy; ask your advisor for more details.
1 This is a simplification and does not extract the risk-free rate. It is immaterial on return and overly complicated to include.
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Disclosures:
Economic forecasts may not develop as predicted, and there can be no guarantee that strategies promoted will be successful. Therefore, the opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
All performance references are historical and are no guarantee of future results.
Securities and advisory services are offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC. All investing involves risk, including possible loss of principal. No strategy assures success or protects against loss.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.