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Investment strategies

October 22, 2021

Investment strategies

John Brennan and Franco Maniaci from Cape Ann Savings Bank talk with John Maher about investment strategies. They cover buy-and-hold, dollar-cost averaging, diversification, and other essential strategies for investors. Then, they explain why investors should take a disciplined approach rather than buying into the media's stories about the "monkey and the dartboard.".

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Podcast transcription

Transcription Disclosure: Below is a transcript of the conversation between John Maher, John T. Brennan and Franco Maniaci. Please note, this is an unedited "word for word" rendition of the actual conversation and is not intended to be grammatically correct.

John Maher: Hi, I'm John Maher. And I'm here today with John Brennan, Vice President and Senior Trust Officer and Franco Maniaci, Trust Investment Officer at Cape Ann Savings Bank in Gloucester, Massachusetts. Today, we'll be discussing investment strategies. Welcome John and Franco.

John Brennan: Hi John.

Franco Maniaci: Hi John.

What Is a Buy-and-Hold Strategy?

John Maher: So we're going to be talking about a number of different types of strategies for investing and the first one is called buy and hold. What is that?

Franco Maniaci: So when we talk about buy and hold, we're talking about a passive type of investing strategy. Doesn't mean you have to be inactive, it's just, as an investor, you are not concerned about short-term fluctuations in the stock market. You believe in long-term economic growth and prosperity. Long-term returns on the stock market have been about 10% over the last 50 years.

So as an investor in this strategy, you are buying into that belief that historically will likely be the potential future returns. This strategy typically has lower costs because you're not turning over the portfolio, you're not trading, you're not changing the security frequently. You also have the chance to defer some of the tax expenses. When you buy and sell a stock or any security you have to pay capital gains if you made money.

So this allows you to keep the gains and potentially later in life or later in time, I should say, pay the taxes when it may be more beneficial. So that's the view on buy and hold. It's also, the term we use when we meet clients is time in the market, not market timing. We're not trying to second guess the market. That's not easy to do. We're not going to always pick the bottom and we're not always going to sell at the top. But we want to be in, regardless of short-term volatility. History showed that panicking and selling during volatility or extreme bouts of volatility can be some of the more costly mistakes any investor can make. So for us, it's about avoiding that short-term outlook. Look at the long-term, look at the historical return and keep that as the focus as opposed to focusing on the day to day changes.

What Is Dollar-Cost Averaging?

John Maher: Okay. And then the next strategy is called dollar cost averaging. What is that, and how does it sort of fit into that buy and hold sort of strategy?

Franco Maniaci: And actually, it fits in quite well. Dollar cost averaging as opposed to investing in a single lump gives you that ability to purchase at different points in the market, whether the market is higher or lower, meaning if you had a pool of money and you invested all one day, now you're subject to what the market does over the next 10 years based on that day you purchase.

Whereas if you use dollar cost averaging, you break up that money into a fixed dollar amount, invest that gradually over time, it's going to smooth out your potential returns. It allows you to maybe buy when the market is low at the same time you could buy when it's high. But overall, it's going to reduce the volatility of your potential return. It's not guaranteed that you won't lose money, but it is a better way of trying to invest rather than just trying to time the market with one lump sum.

John Brennan: John, I'll point out that most people are participating in a 401k plan or other employer plan where they just have money diverted out of their paycheck, their dollar cost averaging into the market each week. So it's a sort of set it and forget it principle, which is usually a good principle for successful long-term investing.

John Maher: Right. So just putting away a certain amount of money, every paycheck or every month that's going into your investing. That's how you do it, as opposed to trying to wait it out. And Franco, like you said, timing the market so that, okay, I think it's at its lowest point now. Now let's put $5,000 in right away. That might not be the best strategy as opposed to just putting in, hey, a few hundred dollars every month.

John Brennan: Exactly.

Franco Maniaci: Right. Because I mean, over time, the average cost of your shares is going to be lower than the average market price. So yeah, that is the better smoother approach.

What Is Portfolio Diversification?

John Maher: Okay. The next strategy is called portfolio diversification. Talk a little bit about diversification and what that is.

Franco Maniaci: So portfolio diversification really is trying to pick various assets that have different relationships, meaning they don't all move in the same direction. That helps to reduce your overall portfolio volatility.

So like for example, stocks and bonds, historically when stocks go up, bonds are either the same or they go down in price versus, and then the flip side, when stocks go down, bonds typically go up in price. So if you had it all in stocks, you're up and down. If you have a mix between stock and bonds, then you're not going up and down as much as the overall market does.

That's what we mean by having some diversification. Not all securities, not all asset classes are going to do well at the same time. And not all are going to underperform at the same time. But having exposure to a percentage of each in a portfolio helps reduce your overall volatility. I have a saying or quote that somebody put down, I don't know the author, but I thought it was quite funny. It says money is like manure, left in a pile it stinks, but if you spread it around, it'll grow. And that's what diversification is for your assets so that they will grow.

Do Mutual Funds Help With Diversification?

John Maher: And we talked before about some different types of investment options. And you mentioned mutual funds as being sort of a way to automatically diversify your portfolio because it's a mix of stocks and bonds and CDs, and things like that. Are mutual funds a good way to start off with diversification?

Franco Maniaci: It is. And that's a quick way to be diversified because typically a mutual fund is going to hold more than one security, whether it be 30 to 50 stocks in a portfolio. You could even buy a mutual fund that buys both stocks and bonds. So yeah, you can get instant diversification by purchasing a mutual fund.

What Is Asset Allocation?

John Maher: Okay. Our next investment strategy is asset allocation. What is that?

Franco Maniaci: So asset allocation is part of the diversification. It's having exposure to various asset classes. And having that exposure helps reduce that overall volatility. And when we're talking about asset classes, we're talking about stocks, bonds, cash, commodities, other assets that don't all move in the same direction, but it gives you that diversification to help you minimize your overall volatility.

John Brennan: We have about five core asset allocation models here that we look at as kind of blueprints. We think of this like portfolio blueprints. If we have an asset allocation that is designed to grow over the long-term, it's really going to have a bias towards stocks. It's going to have fewer bonds and it will tend to be more volatile.

But going back to the sort of the risk, reward discussion, it's going to have that potential for gain versus our most conservative asset allocation model is really going to be geared more towards really preserving the value of money over the long term.

Say that's for a 90 year old. You have, let's say you have somebody who's made a lot of money and they really just don't want to lose spending power, but they don't want to take any more chances. So a capital preservation asset allocation model is really geared towards that. Meaning, hey, let's just kind of beat inflation, but keep things safe and make sure that money is there when we need it.

How Do Investors Determine Asset Allocation?

Franco Maniaci: John's right. I mean, there are several factors we look at in determining your asset allocation and risk tolerance, time horizon, liquidity, do you need cash short term, do you need income? So that all helps to shape your asset allocation.

John Maher: And you would get to that by just talking with the investor, figuring out where they are in their life stage, figuring out what it is that you're investing for. And how quickly are you maybe going to need that money back out, whether it's to make a purchase for a home, or for your kid's college education, or for retirement, and how close you are to needing that money. That's going to determine how you allocate your assets.

John Brennan: That is the key conversation, John. I would say, that's the conversation. Before we provide investment advice, there's this, I call it a series of nosy questions that I'll ask people. Because you cannot give financial advice in a vacuum. If you do, it has to be tailored to the individual and their circumstances and it has to make sense for them.

What Are the Keys to Successful Investing?

John Maher: So we've talked about all of these different investment strategies and previously, we've talked about different types of investing and risk versus return and things like that. What would you say are sort of the keys to successful investing?

Franco Maniaci: I think there's several steps or points that can help you to make successful investments. And that's first, is obviously to educate yourself. I always try to tell them that, know what you're investing in. If you don't know, or unsure, then don't invest in it. Always ask questions, ask the financial advisor questions, whether it be a term you're not familiar with some sort of jargon you hear thrown around on TV. Ask questions about fees, expenses, some of the historical components of what you're investing in.

And then, another one that's very important is to be honest about the amount of risk you're willing to take. Last thing you want to do is invest in something and not be able to sleep at night because you're unsure about the amount of risk you're taking. So be confident in the amount of risk you're taking, decide on the proper asset allocation.

And then most importantly, stick to the plan, stick to your long-term strategy. Avoid the day-to-day volatility, the emotional aspect of investing, and focus on the quantitative part of it, the numbers, the future potential.

Monkey and the Dartboard Vs Disciplined Investing

John Maher: John, any final thoughts?

John Brennan: Well, I do have a final thought and that's, the financial press I think, is dominated by the monkey and the dartboard sort of financial stories. It focuses on the sort of people who play on their hunches and win big. For example, the people who bought Microsoft when it was cheap and, or bought Tesla when it was cheap, or did well in GameStop.

In contrast, what we've outlined here is a very disciplined approach. And I think a disciplined approach is proper and correct for most people and for most of their money. However, Franco and I, or even sometimes customers, we get it if somebody sort of wants to play a hunch or they have a favorite company, or they think there's something really, they think is going to succeed.

Our suggestion is, open an E-Trade account and do that with some of your money, but the bulk of your money and the sort of key to success is really, keep it disciplined and keep it along these sort of rules that we've outlined today. That's not to say that you can't act on a hunch and buy whatever favorite stock you might have. We're not ruling that out. We understand that's part of the investing universe. I think our position is just for the bulk of your money, play it straight.

Contact Cape Ann Savings Bank to Talk More About Investing

John Maher: All right. Great advice. John and Franco, thanks again for speaking with me today.

John Brennan: Thank you, John.

Franco Maniaci: Thank you, John.

John Maher: And for more information, contact the Cape Ann Savings Trust & Financial Services at 978-283-7079. Or, visit the website at capeannsavings.bank.

Investments purchased from the Cape Ann Savings Trust & Financial Services department are not FDIC insured, not FDIC guaranteed, not bank guaranteed, and may lose principal value.

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