Fee-for-service Financial Planner Ed Rempel reviews ways to focus on growth
by Arina Smith Financial Planning 14 April 2020
As an investor, are you focused more on risk reduction or long-term growth?
Different types of investors think differently, as do the different types of portfolio managers you can hire to handle your investments. There’s a real contrast in how different managers approach investment opportunities. It’s worth understanding both if you’re planning to invest.
For example, a hedge fund manager might try to reduce risk and provide a steady return that’s largely market-neutral, while a growth fund manager will likely try looking for a long-term performance that beats the index.
“The hedge fund manager generally wants to minimize investors losses, which often leads to winning by not losing.” says Ed Rempel, a Toronto-based fee-for-service financial planner. “This outlook can provide decent returns and a smoother ride.”
For example, let’s say you invested $100,000, and the market falls by 30%, sending your total amount from $100,000 to $70,000. You’d need a gain of 43 percent to get the $70,000 back up to $100,000. Because the historical average stock market return is about 10 percent per year, it could take almost four average 10% years to recover your initial investment. So, from a hedge fund manager’s point-of-view, if you can avoid or minimize losses, you can provide more consistent returns.
Now, what a growth fund manager will tell you is that, while this assessment is correct, the hedge fund manager fails to note that the stock markets tend to recover. In other words, large declines have historically been followed by large gains. This means that in the past, the largest market crashes generally didn’t take any longer to recover than smaller ones.
To explain further, Ed Rempel reviewed that over the years, there have been no fewer than six periods during which there was a loss of more than 20 percent. He went on to point out that the years following large market crashes tend to have gains much higher than the average 10 percent.
“It is not a coincidence that the biggest bull market in history was from 1933-36, immediately after the largest bear market in history.” he says.
In short, says Rempel, a growth fund manager will tell you not to fear market declines, as the most healthy returns are generally earned by investors who maintain confidence and stay invested over the long term.
Not long ago, Rempel participated in a presentation that was given by a hedge fund manager and a growth manager. The former presented a chart that showed periods of six-to-eight years that showed no growth, during which his fund would have made money. Then, the latter noted that those periods were the six worst periods for investors in 140 years.
“Since that event,” says Rempel, ”I have noticed these differing viewpoints in many fund managers. One is pessimistic and fearful, focused on avoiding losses first, while the other is optimistic and confident in long-term growth.”
He says he’s also noticed that in different time periods, one or the other view becomes much more popular among investors. During most of the 1990s, for example, the optimistic, growth view was most popular with investors, while since 2008, the pessimistic, defensive view has been more popular.
Optimistic portfolio managers focused on long-term growth tend to have significantly higher long-term returns, which can make your retirement more comfortable. Pessimistic, defensive portfolio managers tend to provide steadier returns that can help you sleep at night. It’s based on what they focus on.
At the end of the day, though, he concedes that you have to determine which approach works better to achieve your life goals and which you are most comfortable with. It’s important to explore both options based on your comfort with financial risk and the returns you need to achieve your goals.