Active investment management’s weekly magazine for fee-based advisors

Knowing when to make a portfolio change

by Apr 26, 2023Industry insights

Knowing when to make a portfolio change

by Apr 26, 2023Industry insights

Making changes to an investment portfolio involves both tactical and strategic considerations. However, deciding to have investments professionally managed by a dynamic risk manager is a strategic decision based on experience and market history.


We have to make them every day on a whole range of matters.

While most decisions seem to revolve around choosing between alternatives, another category of decisions tends to be more critical in the scheme of things.

The first type of decision is tactical. It often is reactive. It may rest in logic, but feelings are usually at the heart of it: “This just feels right.” “I like the look of this one.” “I’m feeling bad, and this makes me feel better.”

The other category of decisions is strategic. Strategic decisions are more likely the result of thinking about the issue. Develop a plan, implement it, and evaluate its effectiveness as the results become available.

We adopt a plan, but, at some level, we are also already considering ending it.

As president and five-star general Dwight D. Eisenhower said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

If you’re planning effectively, you’ll always be open to changing your plans.

When should we change our plans?

We all have cell phones, mobile plans, and streaming or cable services these days. When do we terminate one and start a different one?

Generally, if you ask someone that question, you usually get the answer, “When it stops working.”

How do we know if something stops working?

If you think of your cell phone, there are many logical signs. Xfinity suggests you may need a new phone if the screen is cracked, the camera takes dark or blurry photos, the battery is dying, the phone won’t update, or storage space is running out.

These are all good, logical, easily discernable signs that a cell phone doesn’t work or, more particularly, that it no longer satisfies your needs.

When considering changes to an investment portfolio, the same decision considerations come to bear, but I would submit that it is much harder to determine whether a portfolio is working.

As with other decisions, there are tactical and strategic elements at play.

The temptation to make a tactical change

When the market keeps falling, day after day, some traditional investors say they follow a “buy-and-hold” approach. They talk about the advantages of portfolio diversification as a risk-management tool. But when the losses mount up, sooner or later, even the most ardent passive investor can conclude, “Enough is enough.” Usually, that means moving from an aggressive or growth investment to a conservative, defensive approach.

Of course, this is precisely the emotional reaction that can be of concern in making a tactical decision. And studies show that this is often the wrong time to abandon equities. In the 2008 decline, the bottom in the stock market rout occurred on the date of the greatest amount of mutual fund exchanges out of stock market funds.

And then there is the added problem that a decision to sell also creates the need for another later tactical decision—when to buy. Again, emotions can significantly influence this decision.

When should an investor buy back into equity funds after selling out of fear of more significant losses? It isn’t easy to pull the trigger to buy after such an experience. Many investors have taken years, missing massive gains in the recovery, before they find that they can stomach going back into the equity waters again after a significant stock market decline.

Is it time for a strategic change?

In the first decade of this century, the experience of going through two 50%-plus declines in the stock market caused many financial advisors to believe that there had to be a better way. They turned to more active asset managers. Many were pleased to find asset managers who take a dynamic risk-management approach—quantitatively determining when portfolio changes should be made and implementing those changes automatically.

Deciding to have investments managed by a dynamic risk manager is a strategic decision based on experience and market history. It is a recognition that you—whether financial advisor or investor client—want to turn away from emotional decision-making and the constant pressure to do something and turn instead toward quantitatively derived, tactical management by a professional, third-party asset manager.

That does not mean that anyone will become totally immune to feeling the need to make a tactical change when losses occur. It is natural to have these urges. But in this case, it is probably best to stick to the plan. Sticking to the plan is more straightforward, and the impulse to change is more easily overcome.

How investors can better ‘stick to the plan’

When an investor sees losses in their account, they should talk to their advisor about them. A quick check of the current assets held in their portfolio may show that their strategies are already in the defensive position into which they want to retreat, including a greater allocation to cash or even to inverse fund positions.

For example, a review of their statement may show that an investor has significant percentages invested in managed income, gold, alternatives, and actively managed bond funds. Not only did all of these outperform the stock market indexes in the challenging first three quarters of 2022, but they also exceeded the applicable bond benchmarks.

Importantly, actively managed investment strategies not only include sell methodologies based on historically successful processes, but they can also be programmed to buy back into the equity market without jumping over any emotional hurdles.

Investors that abandon the strategies lose the ability to move effortlessly into a defensive position and painlessly back into equities when history suggests that the time is ripe with opportunity. An investor taking that approach is likely trying to “market time” the tactical manager and bring emotions back into the decision-making process. When paying an advisor to make the tactical decisions, it is better to stick with the original strategic plan.

How do you know if your portfolio still meets your needs?

If tactical decision-making is not helpful for an investor using a third-party, dynamic risk manager, when is the appropriate time to make a change? How do you know if a strategy “doesn’t work or, more particularly, that it no longer satisfies your needs”?

First, if you are considering a change, it’s important to clearly define your needs. The trauma of going through market declines may substantially change someone’s views on investing and what investments are suitable for them.

At times like these, a good starting point is for a client to begin a review of their account with their advisor by completing a new suitability questionnaire. Perhaps the stock market was making daily new highs when an investor first completed the questionnaire, and the answers reflected their view of the market environment at that time.

Completing the questionnaire again can tell an investor whether they now have a more conservative risk tolerance. If so, they may want to tone down the aggressiveness of their portfolio.

In the final analysis, what is most important is that advisors and their clients assess a portfolio’s performance over the long term and through full market cycles. Is it still on track to meet their personalized investment objectives, despite a possible short- or intermediate-term period of relatively poorer performance due to unfavorable market conditions?

In the end, it’s usually best to stay the course

Napoleon Hill, the author of the mega-bestseller “Think and Grow Rich,” once said, “Within every adversity lies the seed of an equal or greater benefit.” Changing an investment strategy may open a client’s portfolio up to new opportunities when the market environment changes.

But advisors need to be careful to ensure that client portfolios fully reflect a client’s risk profile as reflected in their suitability questionnaire responses—and that the strategy being changed is actually no longer working. After all, some seeds may take a little longer to grow than we’d like. And the decision to stay the course and to continue the professional management of the account with its existing strategies may be the best decision of all.

The opinions expressed in this article are those of the author and do not necessarily represent the views of Proactive Advisor Magazine. These opinions are presented for educational purposes only.

Past performance does not guarantee future results. Inherent in any investment is the potential for loss as well as profit. A list of all recommendations made within the immediately preceding 12 months is available upon written request. Please read Flexible Plan Investments’ Brochure Form ADV Part 2A and Form CRS carefully before investing.

Jerry C. Wagner, founder and president of Flexible Plan Investments, Ltd. (FPI), is a leader in the active investment management industry. Since 1981, FPI has focused on preserving and growing capital through a robust active investment approach combined with risk management. FPI was named to the 2015 Financial Times 300 Top Advisers and the 2015 Inc. 5000 List of fastest-growing private U.S. companies.

Recent Posts: