Investment Strategy For All Seasons: The ‘No Strategy’ Strategy

Posted on September 25, 2013 at 2:54 PM PST by

Investment strategy has only recently come into vogue on Wall Street. Once upon a time the major investment houses employed brokers, traders, technicians of various types and even economists, but no strategists per se.

The “market strategist” came to the fore as demand increased among the firms’ clients for a sense of what to do as markets changed tack. They wanted a plan, even if the plan changed often.

investment strategy

You can blame the news media for this trend, in part. The media runs on change, on the idea of the new thing coming, not the old thing that we already know and understand.

Like so many toddlers chasing a single new toy on the playground, the media pack is fascinated with the novel, the interesting, the new — even if the new thing is mathematically impossible.

Even better if the impossible turns illegal and there is scandal to report. We probably won’t be reforming the media today or anytime soon, but we can get better at seeing through the narratives they present.

The other driver of the strategist-as-advisor approach is the occasionally demonstrable result of market timing. Every firm seems to have its key figure, a media-friendly guru with graying sideburns who was really right that one time back in 1987, or 2002, or about gold or whatever happened.

Resting on those laurels, he (or she) quietly cranks out dense whitepapers meant to burnish the credibility of the firm. Their trading ideas are concrete enough, but often the timeframes are stretched over years or decades — impossible to prove or disprove until far too late.

Their advice is doled out with an eyedropper to the media to generate interest, and these market strategist types do often have a legitimate advisory job to do, even if it’s just showing up at meetings and speaking in public once a month.

Does having a strategy matter, assuming you could even access this level of advice? Not really.

In fact, the research shows that the best strategy is no strategy. Don’t hide out in cash, waiting for a down market to buy. Don’t load up on stocks and ignore bonds, or vice versa.

The “no strategy” strategy is to own the market, all of it. You buy the benchmarks using index ETFs and spread your money out across multiple asset classes, according to your tolerance for risk.

Investment strategy buckets

When the market veers in a given direction, you buy or sell from each bucket, accordingly. The only rule is to put your asset classes back into balance with regularity, and to keep cost minimized.

Does this approach work? You bet it does. Burt Malkiel, the Princeton professor and author of “A Random Walk Down Wall Street,” found that, over the past 15 years, rebalancing afforded investors a 1.5% premium over the stock market return.

Given that the market alone returned about double what retail investors have experienced over the past 20 years, according to research from Dalbar Associates, that’s quite a bump for no strategy at all.