Generating positive results in unpredictable and often volatile financial markets can be a daunting challenge. But it is not to say that this challenge cannot be overcome. Embracing an approach that utilizes a variety of asset classes to generate returns is one key method of overcoming this challenge and the associated volatility, but it is not the only one. Overcoming this challenge means utilizing this method among others.
This approach is different from “Multi-asset” investing. Multi-asset means simply investing in different asset classes to diversify the portfolio. “Multi-method” investing involves adding an entire additional layer of diversification by utilizing several completely different methods of investing simultaneously in the same investor portfolio. The asset classes and securities are simply tools to be used within the methods. To generate results, it is not simply a mix of different stocks, bonds, mutual funds and exchange traded funds (ETF) that should be considered, but also the variety of ways in which these tools can be managed.
Multi-method investing also considers other alternative asset classes such as private equity or hedge funds, and the methods used within such strategies. Assets cannot effectively generate positive results across a variety of market environments unless there is a method behind how they are invested and managed.
Tying It All Together
The prevailing sentiment in the multi-asset world is the separation of asset allocation and the selection of securities. In the world of multi-method investing, these tasks are not separated. In fact, 4Thought Financial believes that any successful investment methodology is dependent upon these two tasks being executed in cooperation with one another.
We feel that this cooperation must be performed in concert with one another in order to effectively mitigate risk, and to capture opportunity. While mitigating risk is important in market conditions that are either flat or on the decline, it is also important when you want to capture opportunity on the upside.
A multi-method investing approach ties asset allocation, risk mitigation, investment selection and other key functions together. This allows the investment manager to better coordinate how the portfolio will be invested and managed. Best of all, tying it all together makes it that much easier to hit that “sweet spot” between risk and reward.
Mitigating Risk & Generating Performance in a Variety of Market Environments
But the advantage of multi-method investing is in improving the relationship between risk and reward in a portfolio. One essential function of an investment manager is how to balance the two. Limiting the amount of risk that the portfolio faces may reduce but not eliminate risk. Conversely, the portfolio must generate returns to fulfill the financial goals of the investor.
These two functions must be performed regardless of which phase of the market cycle we are in. The only guarantee in the financial markets is that asset values will increase and decrease. There is no guarantee about future results, or any guarantee about future market conditions. The best guarantee that investors can count on is the fact that market conditions will change. We believe that the investing approach must adapt to this change.
4Thought Financial believes that the traditional “Bull” and “Bear” market cycles are insufficient when crafting an investment strategy. Instead, the “Bull” and “Bear” are joined by the “Eagle” and the “Wolf”. This reflects the realization that financial markets are more complex than be described simply by good and bad environments, but that they can also exhibit exuberant and soaring or flat and volatile environments, respectively.
Learn more about how 4Thought Financial utilizes multi-method investing to generate positive results.