Portfolio climate control
Portfolio climate control
Gary Ziegler • Madison, WI
Transamerica Financial Advisors
A Wisconsin native, Gary Ziegler has weathered scorching summers and frigid winters. Like the thermostats he relies on for climate control, active management is at work around the clock—adjusting his clients’ portfolios in all market conditions.
It was a relatively long process for me to fully embrace active or tactical investment management. I had been brought up in the business on the theories of traditional style-box portfolio allocations. Though it was difficult to watch my clients’ portfolios go through volatility at times, that all came with that style of asset management. Portfolios did historically rebound over time, generally speaking, and that was pretty consistent with the principles of buy-and-hold investing.
The financial crisis of 2007-2009 totally changed my thinking. I really saw no reason to ever have clients fully exposed to that type of risk and drawdowns—and the uncertainty about how long it would take to recover.
Some were hesitant, as the concept of active management was very new to them. It flew in the face of things they had read from the business media and some famous investors who are always giving interviews. They were pretty sold on the idea that you cannot time the markets and that low-cost index funds were the way to go, despite how painful 2008 was.
On the tactical side, TFA has developed some excellent client materials and presentations that help explain active management. So have many of our third-party managers.
I will thoroughly go through these materials with clients, explaining about market cycles, risk and return, the math of drawdowns, and the need to play both offense and defense with your portfolios. We look together at some numbers showing how portfolios protected against downside risk, and minimizing those drawdowns, can perform over time versus just sticking with the performance of a market index.
I also use some simple analogies. My favorite involves a thermostat. I will ask my client what their ideal temperature is in their house all year-round. Let’s say they answer 70 degrees. In Wisconsin, weather can go above 90 degrees in the summer and below zero in the winter. However, if you have a thermostat, a furnace and an air conditioner, you can keep your home at a comfortable temperature all of the time. That is the goal of tactical money management—to make your investing experience less volatile. Sometimes you need to run the furnace and other times you need the air conditioner. It is nice to have a thermostat to help keep things comfortable and under control. I try to relate this back to the markets and the fact that you cannot do the same thing in all market conditions—it just does not make practical sense.
On the low-cost index funds, there is certainly a place for them, but not an exclusive place. Strictly investing in that fashion is the essence of buy and hold. Even though markets are healthy right now, investors that invested passively from 2000 to 2013 experienced two downturns of over 40% that dramatically impacted their portfolio returns.
That relates back to the math piece and how hard it is to recover in your portfolio from steep losses. We want the power of compounding—the Rule of 72, if you will—to work on portfolios that have more consistent, less volatile performance, not wild swings. That makes sense to most clients.
For clients with more appetite for risk, we do have available some leveraged strategies that have done quite well in both bull and bear markets, but they carry with them more volatility and the potential for larger drawdowns. That all has to be carefully explained in detail and understood by the client.
We have a very wide range of tactical managers and strategies available to us, and different ways to structure portfolios. It is my job to put together the most appropriate combination of strategies for clients. It is the job of our third-party managers to maintain their disciplined approaches and execute well against their specific strategies.
With both of those elements working well together, I explain to clients that we can better manage market cycles and help them in meeting their long-term investment and planning objectives.
Our organization is totally vested in helping all families with their financial needs, so my clients range from the very affluent to those just starting out—with perhaps relatively little to invest right now. It is gratifying to be able to bring the most sophisticated investment strategies to a wide universe of clients.
Disclosure: Gary Ziegler is a registered representative and an investment advisor representative with Transamerica Financial Advisors, Inc. Securities and investment advisory services offered through Transamerica Financial Advisors, Inc. (TFA), Transamerica Financial Group Division—member FINRA, SIPC, and registered investment advisor. Non-securities products and services are not offered through TFA.
Photography by Nick Berard