Clark at Large: The Times They Are a Changin'

As Buckingham suggested, "buy-and-harvest" essentially means buy and hold until the asset appreciates, and then take some of the profits. The theory is that as assets appreciate, they increase the risk of becoming over priced. So, a portfolio's risk is reduced by selling some of those assets, and buying less risky "under priced" assets.

Yet, we should keep in mind that what stock investors such as the Al Frank folks mean by "buy-and-harvest" is to invest in, say, large cap value until that asset class appears to be overvalued, then sell part of that position, and buy small and/or mid-cap value stocks. In practice, that may sound an awful lot like buy-and-hold advisors, rebalancing their client portfolios each quarter by selling out some of the larger asset classes, and buying more of the under-performing classes. The difference is the conscious monitoring of relative value vs. the automatic selling of whatever class happened to grow faster.

So, when the bottom fell out of all asset classes (save Treasuries) last Fall, advisors' regular rebalancing strategy didn't save most clients from taking that precipitous 50%+ drop. But the Al Frank value-oriented fund owners had less far to fall, and consequently recovered faster: It's flagship Al Frank Fund was off "only" 29.87% in the 12 months ending June 30, 2009, but up 8.37% the first half of 2009, double its Russell 3000 bogey.

Here's the key point: To "harvest" their profits, the Al Frank guys move money between three equity classes. Determining their relative values is a complex, yet finite, proposition. And because their universe is limited, their investors, while losing less than some other equity investors, still took a pretty hefty hit.

On the other hand, advisors looking for ways to better manage market risk are potentially dealing with the entire investment spectrum, a daunting task for folks who, for the most part, have little or no, formal training in economics or investment management. Advisors attracted to a "buy and harvest" strategy, are faced with questions such as: How do you decide when to take some profits off the table? And where do you put those "profits" so that they truly reduce the risk of another across the board market meltdown?

Financial planners typically allocate client portfolios between stocks (in mutual funds), bonds, and cash. In the past, gold, real estate, and oil have also been included. Yet, even if independent advisors in their relatively small shops could figure out a way to economically monitor portfolios containing all those asset classes, the bigger problem is that every one of those classes except cash fell like a stone last fall.

So where does that leave independent advisors? As far as I can see, they have three choices: Continue with the buy-and-hold static allocation approach, leaving clients to deal as best they can with the full force of market volatility; or embrace one of the growing number of market-timing strategies which attempt to avoid market downturns by moving into cash when things appear risky (and possibly hedging or increasing that "bet" through the use of short-selling vehicles); or mitigating at least some market risk through managers such as Al Frank Funds, who try to identify excessive risk (by whatever metric they choose) and move assets away from it, into lower risk alternatives.

Today, it sure seems Cox is right, and the old buy-and-hold may truly be dead, if only because the investing public has lost confidence in it. If the sordid history of tax shelters, limited partnerships, annuities, junk bonds, and international investing has taught us anything, it's that even the best advisors usually falter in the face of overwhelming public demand or aversion. And that leaves either market timing (tactical allocation) or mitigating risk, which is essentially strategic allocation. For my money, being in the market with less risk is better than being out of the market and adding the risk of missing out on the rides up; as did the folks who were in bonds for the last six-months' 60% equity gain.

Oh, and there's also my strategy of taking money off the table for things that just make clients happy. When you buy something you like you eliminate all the market risk. You can't expect people to put off all their fun until they retire: what if we don't get there? Besides, it sure seems that now would be an excellent time to buy that vacation real estate. Talk about buying low.