Investing & Economy

Balancing Risk and Return Through Pro-Active Asset Management

Should you pursue active investing?

Two schools of investment thought often collide. One holds “Active Investing”– continuous portfolio monitoring and corrective intervention – adds little value. Indeed, “Passive Investing” advocates believe buying Index funds or ETFs and just holding them for the long term works best. However, U.S. News and World Report holds “the debate between passive and active fund management is one of the great investing controversies.”

For now, passive strategies appear to have gained the upper hand. As USNWR and numerous similar sources report, passive investing has been outperforming active management for the past several decades. But defenders note a sea change occurring. Driven by a host of shifting factors, the Financial Times shares that many leaders in the investment industry are urging “a shift from passive to active investing.” In fact, the article cites influential pension manager Willis Tower Watson advice that investors who stick to passive strategies may not be as well positioned or diversified as they might otherwise believe.

Lawrence York, founder and Chief Investment Officer of ProActive Advisors, LLC., in Lexington, Kentucky believes any investor using a passive investing strategy is making a potentially costly mistake. This is particularly true for those nearing, or in retirement, he says. York argues that passive strategies typically use fixed allocation portfolios while ignoring risk-for-reward data.

york head“What is really important is to create a balance between a focus on value and risk,” he said. “You need risk management to proactively respond to what the markets are telling you at any specific point in time,” he said. “An active, risk-management approach is crucial for principal protection.”

Looking at the 2008-2009 correction, York points out that active management had big advantages. First, going into the crisis, so many signals were available that the equity markets were at or near their highs alerting active investors to lessen their risk exposure. Then, once the bottom was reached, active managers could see the floor and capture incredible value.
The same can be said for the recent Covid-19 driven market correction. First the drop, then the recovery, then today, heightened risk again after a rebound, York added.

“The market is not static, and neither should you be,” he cautions.

“Fixed allocation portfolios should be actively managed with a proven process. For example, the upside potential for equities versus debt after the correction of 2008-2009 was enormous, but fearful of greater losses investors sold stocks and bought bonds though interest rates were cut to zero leaving little return or upside in bonds.” said York. “Overall, your investment mix should always be based on the risk and return opportunities present. While passive approaches may periodically rebalance, they tend to always be selling or buying at the wrong times.”

Owing to the nature of such investments having no managers, there is no means to protect the investor. By law, a fund whose prospectus promises to invest only in securities linked to a specific stock size or theme – such as S&P500 companies or commercial real estate – are limited to investing in their designated lane.

“Many active managers are similarly trapped. What happens is when the specific sector a manager is invested in reaches its high and all that is left is risk, they cannot diversify. All they can do is swap securities in the same category. But that doesn’t achieve anything when the entire category is at risk,” York said.

york538A key driver behind York’s passion for proactive investing are the lessons he learned in 2006 during his efforts to launch a pioneering website. The goal was to give investors simplified tools for managing their investments. But the project did not go as planned.

York had hired coders in India to do the programming, he never imagined just how much of the work he would need to perform himself. “I was up almost every night running formula after formula, crunching massive amounts of data to test the formulas.

It was through this process that I started seeing – in great detail and clarity – how various strategies led to good and bad outcomes,” said York. “The experience was like earning a Ph.D. It was remarkably insightful and it drove me to develop a value-oriented, but risk-balancing investment approach.”

The key to consistent success is using a process that manages not just return, but also risk. Consequently, once any new client’s retirement goals are defined, York utilizes his 360Portfolios active investment strategy that balances risk and return to target the desired goals. The firm has a five-step process where step one assesses the health of the market right now: what is changing, where are the opportunities (upside) and where are the risks (downside)? What sectors, regions, securities are going to generate the returns needed? Then during the course of the investment cycle, various other steps unfold, but it all leads to step five which is another deep dive into risk assessment asking what has changed? And then the process repeats seeking to lower risk and improve return.

“I get great satisfaction helping clients gain a more secure retirement and removing financial worries. The majority of financial advisors ask clients to commit to a fixed allocation and then put them on autopilot. We’re building our firm with clients who have experienced passive investing failures and appreciate the value of someone who actually watches their money,” York said. “It’s a bit of a tortoise and hare way of building a firm but market corrections tend to spread the word.”

For more information on ProActive Advisors LLC, visit:


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