Help Clients Chase The Highest Probability of Success
The highest average rate of return doesn’t necessarily create the highest probability of success in retirement. Reducing a portfolio’s downside risk can often increase the probability of long-term success, since market cycles and poorly timed downturns are what cause those probabilities to suffer. Instead of chasing the highest average rate of return, we help clients pursue the highest probability of success for their financial and retirement plans.
Protecting Capital And Confidence
Large losses create not only mathematical challenges but also psychological ones, often leading to poor investor behavior—being too aggressive when times are good and selling near the bottom when times are tough. As the famous basketball coach Bobby Knight used to say, “The first rule to winning is… don’t lose the game.” Long-term investing works the same way: a large loss can take years to recover from and undo years of positive gains. To win over time, focus first on not losing.
Losses and gains are not the same. The chart below shows the gains—rounded to the nearest percentage—needed to offset various portfolio losses. When an investor is taking cash flow, these recovery targets become even more challenging. During the Financial Crisis, for example, the Dow Jones Index declined more than 51% from its peak in October 2007 to its bottom in March 2009. Although it eventually recovered, it took many years—and those in or near retirement who needed cash flow were heavily impacted.
In addition to the research put into the investment allocation, and fund selection, we spend time interviewing fund management companies. We have these conversations in a formal setting at least annually, so we can get all of their views on the markets during the same time period. This way, we can compare viewpoints of differing firms in the same time-frame.
When we notice common themes across companies, we dig deeper. If these themes fit in the allocation strategy and continue to leave the portfolio efficient mathematically, then we can integrate those themes into our model portfolios. An example of this would be our belief that interest rates were going to go up in 2022. Based on this belief, we increased exposure to Floating Rate Bank Loans, Short Duration, and Strategic Income Funds before the Fed began raising interest rates.
10% Loss Needs a 12% Gain to get even 15% Loss Needs an 18% Gain to get even 20% Loss Needs a 25% Gain to get even 25% Loss Needs a 33% Gain to get even 33% Loss Needs a 50% Gain to get even 50% Loss Needs a 100% Gain to get even 66% Loss Needs a 200% Gain to get even
We believe in long-term strategic asset allocation. We are not tactical, and we are not market timers. However, we do believe in the value of active management. This way, our fund managers can take tactical advantage of dislocations in the markets with their slice of the pie. Passive Investors talk all the time about the average active money manager not beating their benchmark average. However, they forget to mention that, unlike in professional sports, in investing, we can all hire perennial all-pros to play on our team. In other words, we select money managers with a proven track record of delivering risk-adjusted outperformance over extended periods, though not necessarily in every individual period.