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Posted by on Mar 7, 2014 in AdvisorShares, ETF Strategist

Investment Go-Bag

by Roger Nusbaum AdvisorShares ETF Strategist

Earlier this week a friend posted a link on Facebook to a fun article about how to assemble a bug-out or go-bag. It included things for fire, water, shelter, food and protection. In a similar vein, on the Random Roger blog we’ve often had fun looking at the contents of Jason Bourne’s safety deposit box with all the passports, currencies, Sig Sauer and other spy stuff. The appeals to guys on some emotional level in the belief that we can all be self sufficient, having everything we need at our disposal in a backpack.

There is an investing tie in with a recent article in the Wall Street Journal that addressed blending together active and passive investment products to achieve a desired outcome much like a survivalist or spy would use tools at their disposal to achieve their desired outcome.

The Journal looked at things like adding active management for areas of the capital markets that tend to be less efficient (the article cited small cap stocks and parts of the bond market in this regard), the emotional appeal of trying to outperform and occasionally succeeding along with managing investment expense and a couple of others.

The billions of assets in broad based index funds, more specialized niche products and actively managed funds suggests that many investors (both professionals and do-it-yourseflers) have been doing exactly what the Journal suggests. More and more advisors are using passive ETFs in traditional passive portfolios but are also using these passive funds in active strategies.

The framing of this conversation needs to include creating predictable behavior within the portfolio. Smart beta funds seek to outperform the market; some with the expectation of more volatility than a plain vanilla index fund while some specifically target lower volatility.

Other funds like long/short, some sort of rotation strategy or any other active strategy seek a particular outcome and again this can pertain to using passive funds in an active strategy.

A long/short fund for example might try to behave as an absolute return vehicle or in the case of a 130/30 fund it might try to shoot the lights out with alpha. One is not better than the other, they are simply different and each can have a role in a diversified portfolio.

What is important is understanding the expectation being set by the fund/strategy’s objective. A fund whose objective is low volatility absolute return will create disappointment for the uninformed investor the next time the S&P 500 is up 25% and the fund is up 6%.

Any portfolio is a combination of different holdings with each with different attributes that deliver some hoped for result. Success comes from a proper understanding and objective of each holding.