The Preservation Puzzle: When to Change

We know that in Preservation, clients either ask or at least ponder: What product gives me all the upside and no downside?

Ah, the holy grail! Easy, right? In the Preservation Stage of the investment journey, the primary desire of the client is to protect wealth from a devastating loss, like 2002 or 2008. Because clients cannot always wait for volatile markets to recover (sometimes taking years), they choose the tradeoff of an expectation of a degree of loss certainty versus capturing all the returns of a recovering market. This interchange was perfectly illustrated in 2020. By March 23, equity markets exemplified by the S&P 500, fell 34% from the February 19 peak and not only fully recovered but went on to make new highs by the end of the year. This type of “V”-shaped market can be confusing from a client’s perspective. Because while the planner explained the “lack of a holy grail,” they got the first part of 2020 right (limiting losses), only to drag and “lose” in the recovery. This “win/ lose” tradeoff can be confusing, and a fear of missing out can erode confidence in a longer-term plan. 

Many preservation solutions (including Horizon’s) are varied – some designed to mitigate risk using options, while others de-risk with exposure to Treasuries, like the Risk Assist strategy. But often solutions achieving a “win” in the first part of 2020 would most likely have “lost” in the sharp recovery, based on their inherent design. So, the puzzle. Because there is no perfect strategy, but rather a series of planning tradeoffs, a few rules of thumb are helpful. 

  1. Time: What is the planning horizon? Generally, five to seven years. Typical planning in Preservation can be too short to recover potential losses as is often the case in pure accumulation strategies.

  2. Volatility: Typically, Preservation strategies seek to find success in avoiding the largest losses, providing a client with a smoother investment ride.

  3. Up/Down Capture: These types of strategies should capture less downside and less upside 

And while your client might not be looking for the “perfect” strategy, they perhaps need or desire preservation with a better or smoother upside. Here are a few considerations for a change: 

  1. Clients have experienced an almost “perfect” market for fixed income in the past. Be careful to trade equity drag for a scenario where interest rates either remain historically low or they go up creating losses for fixed income investing. 

  2. Clients may sell and buy at the wrong time. Preservation solutions are designed to help client behavior problems. Clients that panic and sell during a sharp decline, like the first part of 2020 yet never get back “in” during a recovery, can get the worst of both. Preservation solutions can help keep clients engaged in difficult markets that otherwise might compound mistakes. 

  3. Clients might simply not understand the tradeoffs associated with Preservation strategies. 

We know Preservation is important. In fact, in Horizon’s 2020 Annual Advisor survey, 86% of respondents said protection strategies are top of mind. No surprise. Clients that have accumulated wealth or simply have been rewarded for sticking with their investment plans care about having a better understanding of the downside risk of their investments. However, there is no “holy grail” solution, which introduces a puzzle of tradeoffs that the advisor and client need to solve together. 

 

 


Nothing contained herein should be construed as an offer to sell or the solicitation of an offer to buy any security. This report does not attempt to examine all the facts and circumstances that may be relevant to any company, industry or security mentioned herein. It is for the general information of clients of Horizon Investments, LLC (“Horizon”). This document does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation in this document, clients should consider whether the security in question is suitable for their particular circumstances and, if necessary, seek professional advice. 

Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Opinions expressed herein are our opinions as of the date of this document. We do not intend to and will not endeavor to update the information discussed in this document. No part of this document may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without Horizon’s prior written consent. RiskAssist® is NOT A GUARANTEE against loss or declines in the value of a portfolio; it is an investment strategy that supplements a more traditional strategy by periodically modifying exposure to fixed income securities based on Horizon’s view of market conditions. While Risk Assist was designed with the goal of limiting drawdown, Horizon is not able to predict all market conditions and ensure that Risk Assist will always limit drawdown as designed. 

Horizon Investments, the Horizon H, and Risk Assist are all registered trademarks of Horizon Investments, LLC. 

© 2021 Horizon Investments, LLC. 

 

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