Cover Story continued from page 39
That said , he adds that the changes are more on the planning side than on the investment side , as additional income gives clients more options for lifestyle , estate planning and philanthropy .
“ How we manage fixed income is tied not so much to the level of the rates , but to the shape of the yield curve ,” he says . “ It ’ s inverted now , so we can earn more on the shorter maturities than on the longer durations . Flat or inverted , on the margins we ’ ll reduce the durations of our portfolio , so instead of building a one- to 10-year bond ladder , we ’ ll build a one- to five-year bond ladder .”
Buckingham is also using brokered CD investments , as they provide a yield spread over Treasurys that has widened since the meltdown of Silicon Valley Bank , but he reminds other advisors to keep an eye on the $ 250,000 account maximum for FDIC insurance coverage .
“ You can get 120 basis points over what you ’ ll get with Treasurys ,” he says . “ The critical part is that you stay under the FDIC limits . If you go over , you ’ ve got risk you don ’ t need to take on .”
Tried And True
For some advisors , shaking up the investment strategy misses the point of long-term investing in the first place , which assumes there will always be peaks and valleys . So it ’ s not perhaps surprising that a robo-advisor strategist would see it that way .
Mychal Campos is the head of investing at Betterment , a robo-advisor and RIA custodian . “ Our portfolios are built for the long term , with many different macroeconomic and market environments in mind ,” Campos says . “ As such , we currently do not tactically make adjustments to our portfolio allocations in response to short-term changes in market conditions .” He says the firm ’ s current allocations remain appropriate for long-term investing goals .
“ One thing to keep in mind is that while our portfolios are largely passive in nature , our portfolio management is still dynamic ,” Campos continues . “ We do offer automated rebalancing [ to stay in line with target portfolio weights ] based on what becomes under- and overweight in the portfolio . So as the macro environment changes , stock and bond allocations can perform differently over time but portfolio rebalancing options are still an important part of our procedures .”
He says less sophisticated clients will likely adhere to long-term asset allocation advice , but that each of Betterment ’ s portfolio strategies aims to provide both recommendations and flexibility . “ We ’ re very clear in the copy for our web and mobile experiences about the multiple dimensional risks related to each portfolio strategy . At the margins , we do have a cohort of clients who want to trade and invest more actively . For these types of clients , we have a flexible portfolios option that they can consider .”
Looking Abroad
“ I think we are anticipating a mild recession , but we ’ re only calling for a 10 % to 15 % decline in S & P profits ,” Ablin says . “ I think we ’ re actually going to be able to navigate that pretty well , especially if we get an offsetting decline in interest rates : What we lose on the earnings side we ’ ll make up in multiples , and portfolios might end up plowing through a recession unscathed from an equity perspective . I still prefer to have a call option on the debt ceiling .”
Consequently , Cresset has extended duration . “ Earlier in the year we went back to neutral duration in diversified income , and in growth we had a 10 % underweight in U . S . equities , with that allocation moved to gold . Right now we ’ re still 5 % underweight U . S . large caps ; we took half of that gold position and bought international equities .”
He says that once the Fed is done with its hikes , Cresset anticipates that the
“ One thing to keep in mind is that while our portfolios are largely passive in nature , our portfolio management is still dynamic .”
MYCHAL CAMPOS Betterment
dollar will decline , helping international stocks . “ We felt that international developed stocks are not only cheaper , but their currencies are also cheaper than the dollar . There ’ s two ways of winning by holding international equities .”
“ We currently favor gold over cash ,” Ablin maintains . “ We ’ ll forgo the 5 % yield we can get in savings because we think the dollar is expensive relative to gold and foreign currencies . Cash is a push for us .”
But at the end of the day , Ablin says , portfolios have to be structured around an investor ’ s tangible goals .
“ Our job is to take the cash-flow stream that our clients present to us and provide the advisor with a frontier to guide a series of choices they make with the client ,” he says . “ That way , they can sit down with the client and say , ‘ Look , if you commit a ton of capital to these goals , you have a 100 % chance of making sure the cash is there and makes it to a checking account every month if you need it . But if you ’ re willing to accept a 95 % chance of meeting those goals , you can commit substantially less money and do more now .’ That ’ s the trade-off .”
PHOTOGRAPHY COURTESY OF THE INVESTMENT SPECIALIST JUNE 2023 | FINANCIAL ADVISOR MAGAZINE | 57