Why you should care

Since so many of us are responsible for our own retirement savings, it’s good to know what choices are available.

Keith Miller had that sinking feeling in 2008 when, nearing retirement, he watched his investment portfolio lose 40 percent in the market crash. That was it. For some 20 years, he’d hired financial advisers and sometimes done his own investing, but with the same results. “I don’t think the buy-and-hold thing really works anymore,” he tells OZY.

Now retired, the 60-year-old engineer, who designed mooring systems for offshore oil rigs, lives on a 42-foot sailboat anchored off the Florida Keys with his wife and their cat. And he sleeps well at night, after entrusting his nest egg a few years ago to one of the latest ideas in active money management: trend timing. The results, he says, are “pretty good.”

It’s the elusive holy grail of investing — timing the market — where if investors aren’t selling out at the top of a bull market and jumping back in at the bottom, they’re at least trading enough to limit losses and magnify gains. Trend timing is the 2015 version of a dark art, pursued with high-speed computers, multiple models and investment instruments not even dreamed of a few years ago. Managers execute increasingly complex strategies with a single mouse click using a vast array of investment possibilities, like electronically traded funds (essentially, mutual funds that can be instantly traded on stock markets), which capture every conceivable investment idea, from the Malaysian ringgit to a plain-Jane market index like the Standard & Poor’s 500.

Yet a Wild West range war continues between proponents of two starkly different investment approaches battling to win investor dollars. The debate has taken on new importance, with more and more of us responsible for managing our own retirement savings. Miller has joined the active manager’s camp, embracing the idea that it’s possible to identify what’s cheap or expensive, at least often enough to break even — and maybe even boost investment returns. Passive managers think that’s hooey. Using cheap index funds, they buy up everything in an asset class and hang on, often for years.

Other money managers say they’re trying to squeeze emotion out of the process and make trading as mechanical as possible.

Dave Moenning, chief investment strategist at Heritage Capital Management (where Miller put his money), says he has been timing the market since he first started in the business in 1980. It was simpler in the old days, he says. You were either in or out of the market. The strategies revolved around basic concepts, such as buy-and-sell signals based on price trends, or the shifting financial ratios. A 2002 paper by economist Pu Shen at the Federal Reserve Bank of Kansas City confirmed that some strategies made money. Yet Moenning discovered that the strategies had a limited shelf life. “Nothing works all the time,” he says.

Fast-forward to 2015: Moenning runs his portfolios with 10 or more financial models, followed by computer programs, that give signals not just to buy or sell, but also to adjust the relative size of an investment and reweight a portfolio to prepare for hard times or good times. Moenning says he’s “pretty confident” he can read whether the market environment is positive, negative or neutral, and he has made money for his clients. But he can’t advertise his past performance, under government regulations, because he keeps changing the mix of strategies, some of which are less than a year old. “This is the better mousetrap,” he says.

Other money managers say they’re trying to squeeze emotion out of the process and make trading as mechanical as possible. “I don’t look at what we’re doing as timing at all,” says Jason Wilder, executive vice president at money manager CMG. One of CMG’s portfolios, for example, shifts investments “tactically” among asset classes — such as domestic and international stocks, bonds, commodities and real estate — depending on what the model says looks like a better buy. Easier said than done. The process involves assembling good data, developing a model, back-testing it against historical data and testing it going forward before rolling out a product that might focus on growth or wealth preservation, explains Ted Lundgren, co-founder of Hg Capital Advisors and incoming president of the National Association of Active Investment Managers.

Still, research suggests that active-management approaches, including market timing, are flawed. John Gorlow, CEO of Cardiff Park Advisors, with just over $1 billion under management, takes the opposite tack to active management: using low-cost index funds, with asset allocations tailored to an individual client’s needs. He says his clients understand the need to lower expectations “in exchange for a more predictable pattern of return.” Only a few of Gorlow’s clients bailed during the 2008 market crash. (Gorlow, like other investment advisers, says he manages investment portfolios of securities but doesn’t promise or advertise performance.)

In fact, for many investors, the choice of active or passive may be less important than getting and sticking with an investment plan, ideally from a trusted adviser who doesn’t charge too much. Bobbing in the warm waters off southern Florida, Miller says he is confident he has made the right choice with Moenning. Plus, managing his portfolio via an uncertain Internet connection on a sailboat didn’t seem like a great idea. “We’re relying on him to make fewer mistakes than we would.”

Comment

OZYFast Forward

New trends and breakthrough thinking in politics, science, technology, business and culture. It’s futurism at its best.