Portfolio Strategy Zooms In on Buffett's Market Tactics
What You Need to Know
The approach emphasizes reassessing asset mixes throughout market cycles.
The key to the strategy is buying fear and selling greed.
However advisors choose to manage clients’ retirement funds, it will always be a balancing act.
A new portfolio management technique developed by the investment team at Dunham & Associates aims to complement traditional bucket strategies and partial annuitization to help retirees address both longevity concerns and sequence of returns risk.
The so-called “DunhamDC” strategy operates according to an algorithmic management approach, said Salvatore Capizzi, an executive vice president at Dunham. The technique seeks to implement Warren Buffett’s portfolio management advice: “Be fearful when others are greedy and greedy when others are fearful.”
In practice, Capizzi said, this means consistently rebalancing portfolios throughout a market cycle in order to own fewer stocks when the cycle hits a high and more stocks when it hits bottom and begins its way back up.
“It’s not about market timing,” Capizzi emphasized in a recent ThinkAdvisor interview. “It uses an algorithm that is unemotionally based on math and time. It eliminates complicated strategies and human emotions.”
The strategy has been tested over several years as a portfolio overlay, Capizzi explained, and the firm formally launched DunhamDC as a public investment option in April.
The fund is offered as part of an advisor-led retirement income planning program that features other funds with complementary objectives, including emergency spending, health care spending and legacy planning.
While he is excited about Dunham’s specific strategy, Capizzi noted the importance of advisors understanding that their retirement clients face a balancing act when it comes to managing their portfolios.
“The sting of sequence risk stems from the fact that the very asset class that can protect retirees from inflation and provide necessary long-term growth for increased longevity — equities — is also the one that could deplete their savings prematurely due to the sequence of returns,” Capizzi explained. “Add higher inflation to the picture and it’s a really tough challenge.”
Advisors who can navigate these countervailing pressures, he said, will shine in the eyes of clients and prospects, while those relying on outdated techniques could find themselves losing favor.
The Retirement Journey
Three factors define the retirement investment challenge, Capizzi detailed. These are inflation, increased longevity and sequence of returns risk.
“As financial advisors, managing these interconnected risks is crucial for any well-constructed plan,” Capizzi said. “The paradox lies in how these factors influence retirement planning and what helps one factor can potentially devastate even the most carefully planned plan.”
Echoing his recent blog on the topic, Capizzi likened the fight against these considerations to the effort to sail from California to Hawaii with enough supplies to last the journey.
Inflation can be thought of as a constant headwind, steadily pushing against the ship, making progress harder and requiring more supplies — money, in the case of retirement — than anticipated.
Extended longevity, in turn, is akin to discovering mid-voyage that Hawaii is farther away than originally thought. So, the supplies must last for a longer journey.
Sequence risk, finally, represents unpredictable storms during the voyage.
