SprottWealth Insights

The Importance of Portfolio Strategy: Consistency & Long-Term Strategy

Why focus on long-term strategy?

When an investor thinks about the history of the stock market, the dates that come to mind are always the sudden shocks and financial crises. No matter the age of an investor, some upheaval exists as a reference: from the Great Depression of 1929, Black Monday in 1987 or the more recent 2008 Great Recession. The effect of these market shocks is that investors tend to increase cash as a percentage of household assets, or they revert to a status-quo portfolio allocation that often does not correlate to their long term goals. As the chart below depicts, investors with a long-term strategy reap the benefits of patience and consistency.


The long-run performance of U.S. stocks


Source: Shiller, FactSet, J.P. Morgan Asset Management. Data shown in log scale to best illustrate long-term index patterns. P/E ratios shown at price peaks and troughs use trailing four quarters of reported earnings and are shown as a one year average



Why is consistency important?

Often, investors do not have a systematic approach to investing and make hasty, emotional decisions that have them exit from asset classes due to negative short-term performance. Making hasty investment decisions based on short-term performance in periods of volatility can cause investors to exit an asset class that still has the potential for strong long-term growth. Creating an investment strategy and staying the course during downswings in the markets will outperform unsystematic investing in the long run.

According to JP Morgan Asset Management a 50/50 stock/bond portfolio allocation in 2011 would become a 60/40 portfolio in 2013 due to stock outperformance1. This poses problems with value going forward due to the volatility inherent in the stock market. Therefore, as depicted in the chart below2, rebalancing improves long term performance.


Total return USD, 40% US Equity, 15% EAFE Equity, 5% EM Equity, 40% Barclays Aggregate

Source: Standard & Poor’s, Barclays, MSCI, J.P. Morgan Asset Management. Portfolio simulations start in 1998 with a base value of 100. Data are as of 2/27/2014.


Why are active portfolio management and asset allocation important?

Asset allocation refers to the strategy of dividing investable assets among different asset classes in order to increase returns while reducing risk. Each asset class has different risk-return characteristics. In order to determine which asset classes an investor should be invested in, and to what extent, their advisor should think about their goals and objectives, time horizon and risk tolerance.

A study published in the Financial Analysts Journal in 2010 by Roger G. Ibbotson of Yale University outlined the importance of asset allocation and active portfolio management.  Using regression analysis (a statistical process which estimates relationships between variables), the journal found that asset allocation policy and active portfolio management explain almost 90% of the variations in market returns in excess of the benchmark for the period of May 1999 till 2009. The data shows that asset allocation policy and active portfolio management equally account for the variation in excess returns. The conclusion of the data is that while market movements explain the majority of variation in the benchmark return, in order to generate return in excess of the benchmark, asset allocation policy and active portfolio management play the defining roles.


Why Smart Money?

Consistency and active portfolio selection typically provide higher returns than random investment decisions and passive management. These principles have been used in the creation of SprottWealth’s Smart Money Portfolios.

The Smart Money team actively selects and monitors each fund in each portfolio. You effectively have an institutional-caliber team managing a mix of the best money managers in Canada, on your behalf.

We maintain a list of funds that could potentially add value within each of the model frameworks.  We analyze the funds frequently and if the value of a prospective fund exceeds the value of an existing comparable fund, the model can be changed. Smart Money portfolios incorporate what we believe to be a consistent, long-term strategy that focuses on maximizing investor returns while also respecting investor risk-tolerance.

Within this structure, the portfolios seek to create value through active portfolio selection and asset allocation. Speak with your advisor or click here to learn more about SprottWealth’s Smart Money Portfolios.



1 JP Morgan
2 Researchgate.net