By far, the hardest part of managing other people’s money is not just the research that goes into building a portfolio or picking the specific assets, but the psychology of how a client feels relative to the current market place and their specific goals, which are not always realistic. Of course, as an investment manager, there is a lot of information needed from a client before recommending portfolio allocations and assets.
We all wish we could easily fulfil most clients’ request to “just make money, but don’t lose a cent.” Unfortunately, as professionals, we realise that has never been possible, nor will it ever be. However, what we have learned is that the more education you provide a client about the complexity and nuances of investing, the better they become not only as investors but as clients.
We know investors care deeply about protecting the capital they have worked hard to accumulate. And as investors approach and enter retirement, managing risk becomes even more important. So, while most firms focus on alpha (i.e. generating excess returns), our first focus is on risk: we seek to improve risk-adjusted returns by prioritising downside risk (“drawdown”) management.
We believe in quantitatively-driven investment approaches, powered by the evidence-based insights of consistent, thoughtful research. We focus on the application of value, momentum, quality and trend in tactical asset allocation. We believe process consistency is paramount for long-term investment success and is best achieved through systematic approaches which help mitigate the behavioural biases that often lead to poor investment decisions.
Below are 2 key pillars of portfolio construction that help us in managing risk whilst trying to achieve our clients’ objectives.
Traditional views of diversification tend to focus on asset classes (e.g., equity, fixed income). Asset classes are essentially just legal definitions, and while they help steer you towards diversification, they’re not the only thing to focus on.
Effective diversification requires you look at the underlying source of risk. Diversifying across the underlying source of risk, whether it’s related to the yield curve, the performance of a company or the inflation environment, is the core of a solid investment strategy.
For instance, if you had held stocks and bonds from the same company in your portfolio, you would have held assets that belong to two different asset classes, but the risk you held was not linked to the asset class—it was linked to the company.
By implementing effective diversification as a strategy, you may be able to stabilise your portfolio by minimising company overlap between your stocks and bonds.
There’s one easy and reliable way to increase your investment returns, and you don’t have to be an expert to do it. All you must do is reduce the amount you pay for your investments. The lower your costs, the more likely you are to get better returns.
That may sound counter-intuitive. We’re used to higher quality things costing more money, and it makes sense to think that you’d have to pay big bucks to access the expertise and superior performance of the best investment managers in the world.
You’ve got to spend money to make money, right?
Well, the opposite is true when it comes to investing. Both the research and the numbers back up the claim that the less you pay, the better your returns. The best part about all of this is that cost is one of the few investment variables that is directly within your control. You can’t predict what the markets are going to do, but you can absolutely control how much you pay in order to access them.
Index and exchange-traded funds typically use passive guides and charge a fraction of the fees that most active asset managers charge. They also have low turnover in their portfolios keeping costs low. However, while less expensive, these funds won’t outperform the index, but will simply track it.
Actively managed funds are managed to outpace the indexes and are appropriate for investors who are concerned about losses in a down market since these managers can use strategies to guard against this risk. It’s critical to pick active managers with care, choosing those with low fees and positive results in both negative and positive markets, as well as those with low turnover (which is the percent of holdings that are bought and sold each year).
Look for an advisor who offers either a flat rate fee or a deeply discounted annual percentage fee based upon assets under management. Investors should be both diligent and discriminating when fighting back on fees. You only want to work with companies that provide a high level of transparency. All investment fees should be clearly spelled out and accessible on the company’s website or minimum disclosure documents. In most cases, if you have to ask, they aren’t telling you something.
Long-term investors really can’t afford to lose up to 40 percent of their portfolio’s value to high fees. So, take a stand, get educated, and fight back on high investment fees. Decades down the road, when you’re counting your money in retirement, you’ll be glad you did.