In an attempt to solve two of the biggest problems in investing – inadequate consistent returns and downside risk management – investors are faced with volatile markets that are driven by geopolitical challenges, economic uncertainty, and inflation. As a result traditional portfolio management has come into question. Does what worked 30 years ago work today?
In the last few decades, markets have changed from a fundamental-based investment management style to a technical analysis, algorithmic trading environment. I believe traditional asset allocation, also known as modern portfolio theory, is beginning to fail. Instead, pre-retirees and retirees are now faced with markets that can fluctuate significantly in any given day. I believe engineering portfolios based on a targeted return is the future.
My investment process
Would you travel the world without a destination and a plan to get you there? Traditional asset allocation is just that. With the majority of markets traded by machines, not humans, the destination for the institutional world is much different than the destination for the individual investor world.
Step One: Where are you headed?
Through a fact-finding question and answer session, we will determine where you’re headed, what life will likely cost when you get there, and the time frame for achieving your goals. Identifying what you want your life to look like will determine what your investment allocation needs to look like.
Step Two: How much of a return do you need to get to where you’re going?
I believe risk should not be based on your age. Instead, it should be based on what type of return is needed to achieve your goals. For example, if a 25-year-old is planning to retire at 65 and is able to contribute 10% of his income each year to his retirement fund, does he need to take any aggressive amount of investment risk? We need to look at the cost of his lifestyle today compared to the likely cost of his lifestyle in the future. Often times we discover that he doesn't need to be an aggressive investor. Instead we find that most younger people can lower their risk and achieve a targeted return that will allow them to achieve their goals.
Step Three: Engineering the target three-year average return/risk portfolio.
We design our portfolios based on a targeted return that is needed to achieve the long-term goal. By engineering a three-year average return that is needed to achieve the goals, we are able to reduce risk, minimize downside losses, and increase consistent returns.
We shouldn't be asking clients "are you a conservative or aggressive investor?" Today the question needs to be what is the average return needed to achieve your goal?
For more information and a free 20-minute complimentary phone conversation about achieving your goals in a engineered, risk-managed portfolio approach, complete the form on this page. Or reach out to me directly at firstname.lastname@example.org.