This article is part of a regular series on thought leadership from some of the more influential ETF strategists in the money management industry. Today's article is by Andrew Gogerty, vice president of investment strategies at Boston-based Newfound Research.
Faithful readers of Newfound’s research blog know we believe the optimal investment plan is, first and foremost, the one an investor can stick with. This concept bears even more weight in an advisor/client relationship, where multiple views, biases and emotions about the market and investing intersect at the meeting room table.
Biases are often rooted in sources of investment education around risk, return and what constitutes a “proper” portfolio. Advisors and investors can combat the potential for misbehavior or emotional portfolio decision-making with thoughtful asset allocation.
Newfound was recently named Strategist of the Year by ETF.com in part for the philosophy and process behind our QuBe Model Portfolios. But whether you fall in the “buy it” or “build it” camp when it comes to model portfolios, keeping investors aligned with, and on point with, their investment plan generates the highest probability of success.
Below we highlight three aspects of portfolio construction that can—especially in building out a model portfolio lineup—counteract emotional asset allocation decisions.
Explicitly Overweight Reference Benchmarks
Like it or not, investors love common benchmarks like the S&P 500 Index—even for their total portfolio. But if you were to ask them, “Would you replace your total portfolio with the S&P 500?” you will get a resounding “No!”
Therefore, any deviation (in holdings or returns) must have a high probability of producing positive asymmetric returns or reducing risk. Evaluating investor tolerance for “being different” is crucial to keeping investors on task with their investment plan.