At Natixis, John Hailer Spearheaded Initiatives That Supported a Wider Evolution of Investment Portfolio Construction. Currently, He Maintains Commitment and Belief in This Strategy.
Investing in a volatile and rapidly changing market can be intimidating, especially if you are a novice. The good news is, with the right strategy and approach, you can create a well-built, diversified investment portfolio that ensures long-term success. John Hailer, Chairman of Diffractive Managers Group, the fund arm of Boston-based 1251 Capital Group, emphasizes that investment portfolios must not focus on just returns but also incorporate short- and long-term risk and volatility. Portfolios that can withstand the short-term ups and downs of markets keep more investors invested for the long-term.
Playing The Long-Sum Game
“Staying invested is one of the biggest drivers of long-term success,” said Hailer. “You can’t time the market, and you can’t sit out a downturn.”
The principle of long-term investing is well-known, but it is not enough to ensure success. Investors must also have a well-diversified portfolio that provides resilience to short-term fluctuations. Previously the CEO of Natixis, John Hailer believes that the biggest risk most investors face is themselves, and it is the responsibility of the investment industry to help them make the right decisions to secure their future.
“Fresh out of college, my first employer, a storied Boston-based investment firm, adhered to the “Prudent Man” rule, promising to “never touch the principle,” a simple investment philosophy that made a big impact on me and still drives me today,” said Hailer.
The Prudent Man Rule
The “Prudent Man” rule established a standard of prudence based on “income and safety of principal with a view to the permanent disposition” of investor funds, dating back to the days of Natixis. John Hailer believes that the investment industry moved away from this principle and lost its way, which led to the 2008 financial crisis.
The problem, Hailer explains, is that too many investors had been sold investment strategies – excellent in their own right – with too little regard for how these strategies fit in with the rest of their portfolio. It is like a basket filled with every type of fruit imaginable is still just a basket of fruit.
Utilizing Ratings Systems
The ubiquitousness of fund classification systems, though well-meaning drivers of transparency, can also pose a challenge for individual investors seeking a well-constructed, properly diversified portfolio. Hailer explains that rating systems are great for transparency and great for investors, but investors need financial professionals to help them utilize them.
For example, consider a portfolio filled with the most highly rated funds across each category. Such a portfolio makes two big mistakes. First, it is built with too little regard for how these funds fit in with the rest of the portfolio. Second, the ratings are based on past performance and do not predict future performance. A diversified portfolio that takes into account short- and long-term risk and volatility is much more likely to ensure long-term success.
The challenge is to create a well-diversified portfolio that provides resilience to short-term fluctuations. Hailer explains that investors should consider allocating assets to alternative investments to provide diversification to their portfolios.
The Rise of Alternative Investments
Alternative investments are asset classes outside of traditional stocks, bonds, and cash. These assets include real estate, commodities, hedge funds, private equity, and other non-traditional investments. Already supporting diversification at Natixis, John Hailer explains that adding alternative investments to a portfolio can provide diversification benefits such as lower volatility, increased returns, and downside protection.
“Alternative investments can offer investors exposure to unique risk and return drivers that are not accessible through traditional investments,” said Hailer. However, Hailer emphasizes that adding alternative investments to a portfolio is not a panacea. Investors must be careful in selecting the right investments and diversifying their portfolio.