What Kansas Weather Can Teach Us About Investing

According to CurrentResults.com, the yearly average high temperature in Eastern Kansas is in the mid- to high 60s. (Nice!)

The area’s average annual low temp is around 45 degrees. (Not bad!)

And average daily rainfall throughout the year is about one-tenth of an inch. (Hardly enough to notice!)

So don’t worry about buying shorts. Throw out your winter coats and umbrellas. All you need are some light sweaters (maybe some polo shirts, depending on how hot you run), jeans, and some warm pajamas for those chilly nights.

Right.

Much as Kansas has distinct seasons that follow the calendar, investments have different seasons that follow changes in the business cycles. As economic growth accelerates, various asset classes tend to act a certain way. As growth decelerates, they may act differently. And as economic activity declines outright, they can typically act even more differently.

Buy-and-hold investing is a passive strategy that can do a lot of the heavy lifting toward satisfactory investment outcomes over the long term. Buy-and-hold adheres to an investor’s long-term, strategic asset allocation (SAA). But it falls short in adapting to meaningful changes in the investment climate, leaving investors unprepared for extreme investment conditions (good or bad). It can be like wearing a light sweater year-round in Kansas.

Conversely, tactical asset allocation (TAA) is an active strategy that recognizes the different investment seasons and adjusts around an investor’s SAA. It looks to exploit potential opportunities for outsized gains in certain areas. It can also reduce exposure to corners of the market with potentially outsize risk, mitigating the impact of a downturn.

The current market provides a great example of the kind of support TAA can provide a portfolio, as we believe defensive tactical shifts have been very warranted.

TAA has several notable characteristics:

  • It’s disciplined. Any investment shifts are limited and short-term. Investments are adjusted only within a predetermined allowable range. After an appropriate amount of time, they are adjusted back to long-term targets.
  • It doesn’t require forecasting. We’ve shared in the past our disdain for making explicit forecasts. Market prognosticators far too often miss their mark. But you can still make tactical adjustments based on current observable conditions or metrics, such as determining which investments look uniquely cheap compared to others.
  • It’s tax-aware. Any deployment of TAA within a portfolio should attempt to minimize undesirable tax consequences.

It’s a good idea to dress appropriately for the weather. I don’t know what the temperature will be one month from today. But I do know that it will be July, and it will probably be very hot. Whatever I find myself doing, I doubt I’ll be comfortable wearing a light sweater. And I know it’s a good idea to hold onto my winter coat and umbrella for future use.

It’s a good idea to invest appropriately for the season, too. Being tactical helps prepare and protect your portfolio during changes in market cycles.

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James Walden, CFA

As a partner and the firm’s Chief Investment Officer, James Walden strives to maximize our clients’ long-term, risk-adjusted portfolio returns. This includes determining strategic and tactical asset allocations, as well as specific investment analysis and prudent rebalancing. Jim is also a partner and management team member. His expertise includes advanced investment research and valuation, and he is passionate about his role in helping clients reach and exceed their financial goals.