Diversification Benefits of 'Sailing & Rowing' Investment Strategies

Kevin T. Cooper, CFA®

Vice President | Head of Investment Research

It’s easy for advisors to become complacent about portfolio structure by focusing mainly on investments that fit well with the present environment. As the current 10-year bull market marches on, there is a natural bias toward investments that participate in the market’s gains. But the temptation to ride the current wave of growth may be leaving clients exposed to unnecessary risk. 

Sailing with the Market

The terms sailing and rowing describe two different investment approaches—the first aimed at harnessing market growth (beta) and the second at generating returns independent of the market (alpha). Sailing strategies are what most people think of as investing: Buy a security or fund and watch it go up. In the analogy, the boat represents the investor’s portfolio, the wind is the market’s growth, and the sails are investment options that capture that growth. The boat’s destination is, of course, the investor’s financial goals.

Sailing works well when there is wind. But when the wind dies, the passenger is stuck if they don’t have another means of getting around. Similarly, in investing, sailing strategies become a liability in a down market. Without the wind of the market’s forward momentum, currents can pull a portfolio off course, threatening progress toward the investor’s goals. 

Rowing Against the Current

Rowing strategies may help provide an answer to this problem. These strategies are geared toward making money regardless of the direction of the market. Thus, they work best in flat or declining environments.

The chart below shows secular (longstanding) bull and bear markets since 1926 and how an initial investment of $10,000 might perform. As you can see, the bear market declines can be fairly drastic and include sharp pullbacks for investors. In bull markets, sailing strategies usually win; in bear markets, rowing strategies will often prevail. 

Sailing and rowing strategies alternate being in and out of favor depending on the cycle at hand.

Why Using Both Approaches May Make Sense

While it may seem wise to simply shift strategies to match the current market environment, there are many reasons to use both approaches in tandem. First, trying to accurately time the shift between growing and retracting markets has proved largely impossible. Investors who place bets on that timing and get it wrong do significant damage to their returns. Additionally, understanding whether the economy is in an expansive or stagnant mode is usually determined in hindsight. No one can tell with certainty that a shift has happened until after the change has taken place. By that time, it may be too late to change strategies at reasonable valuations.

Another reason to employ sailing and rowing strategies simultaneously is to reduce volatility. The simplified example below highlights the timeless truth that more stable returns mean fewer downdrafts, which can lead to greater returns (and calmer, more satisfied clients) over time. 

Using both sailing and rowing strategies in tandem may result in greater stability that produces better returns over time.

  "Stable" Portfolio "Volatile" Portfolio  
Year 1 8% 15%  
Year 2 8% -25%  
Year 3 8% 34%  
Average Annual Growth Rate 8% 8%  
Compound Annual Growth Rate 8% 5%  
Hypothetical Growth of $500,000 initial Investment $629,856 $577,875  

The Role of Correlations

The distinguishing factor separating sailing and rowing investments is their correlation to the stock market. Sailing strategies will be more volatile, with correlations close to 1 as they perform in sync with the market. Rowing strategies are more stable and predictable, generating performance that is independent of market returns, resulting in low (<.5) or negative correlations. The following tables show ideas for sailing and rowing strategies that can be combined for potential diversification benefits.

Talking to Your Clients

The sailing and rowing analogy is highly intuitive and thus easily understood by clients, making it a powerful way to lead discussions about portfolio structure. The concept of achieving lower volatility and a smoother ride will appeal to most clients. Be sure to discuss the tradeoff that comes with maintaining a higher level of risk management: In strong bull markets, rowing strategies will be a drag on performance. But when the market inevitably turns, those same strategies can keep clients out of deep water.

By using both sailing and rowing strategies in tandem, you potentially add an additional layer of risk management to a client’s financial plan, giving them greater peace of mind and helping them feel better prepared for whatever the markets may bring.


Kevin T. Cooper, CFA®

Vice President | Head of Investment Research

PUBLISHED: January 13, 2020

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