Better returns with adaptive management?

The first thing Brian Rezny tells his clients is to turn off the TV. “The financial news is usually hype, a dollar late and a dollar short,” he says.

The second thing Rezny, a fee-only planner based in Naperville, Ill., tells clients is that if they want a real return on their money, “They have to accept some degree of volatility.”

“The problem with typical asset allocation,” Rezny explains, “is you’re almost always invested in the two major categories (stocks and bonds) even when you shouldn’t be.” Compounding this, he adds, the stock portion of the portfolio is frequently U.S.-based.

Such a narrow approach leaves investors vulnerable in a downturn, he notes, when the U.S. stock market declines. And if they also have a significant portion of their assets in bonds, they could experience a double-whammy, if interest rates are flat or slowly declining.

Instead, Rezny bases his portfolio management on a type of relative strength strategy that he terms ‘adaptive management.’ “Your investment strategy has to be adaptive,” he explains, to manage risks and take changing circumstances into account.

Rezny’s objective is to achieve consistent returns for his clients while minimizing their risks, and this requires him to reallocate his client’s portfolios on a monthly basis. His firm won’t purchase an asset, he says, without having already determined the sell triggers and having an exit strategy in place.

His adaptive strategy takes advantage of some 40 to 50 broad-based asset categories including commodities, foreign currencies, publically traded REITs—both domestic and international—and inverse ETFs, which move in opposition to their index.

An example of what this might mean for a client’s portfolio is gold, which Rezny purchased through an ETF and held in clients’ accounts for most of 2012. But last December, following relative strength principals, he sold the gold fund and replaced it with another ETF that invests in S&P midcaps, which he still holds for his clients. Year-to-date: The gold ETF is down 20%, while the midcap fund is up 25%.

For reprint and licensing requests for this article, click here.
Investment insights Global investing Mutual funds REITs Fixed income Investment products Financial planning 30 Days 30 Ways
MORE FROM FINANCIAL PLANNING