Different economies create different investment markets. Different investment markets have different assets that provide leadership or perform poorly. Correlations between investment assets change direction. Spreads of expected returns widen and narrow.
Analyzing markets historically is relatively easy and clearly documents the foregoing philosophical statements. Forecasting markets in a future context and making appropriate changes in investment strategy is difficult. Two crucial variables come into play: the time frame and the process of human decision-making.
DeMarche believes that timeframes should be defined and compartmentalized. We believe human decision-making is less “efficient” than economists taught us in the 1960s and 1970s and more “behavioral” as sociologists have taught us for years.
- Integrate Investment Policy with financial decisions.
- Investment decisions must consider investment, business and legal/fiduciary risks.
- Equity Diversification – balance of growth/value, large/small capitalization, and domestic/international.
- Value Tilt – adopt a strategic bias toward value equity strategies.
- Alternative Strategies – fund-of-funds structures are advantageous in most cases for core exposures.
- Active management can add value.
- Enhanced index strategies are attractive solutions for large cap and fixed income.
- Behavioral finance theory has a significant influence on asset management.
- Fewer managers should be used to protect against over-diversification.
- Equity markets rotate through distinct phases, different stocks and management styles lead/lag in each phase.
- Global Dynamic Asset Allocation is a viable investment strategy in trendless, volatile, and bear market periods.