The reason we all invest is to fund something. Whether that something is a comfortable retirement or a permanent legacy or something else, it is vital to keep in mind that stocks, bonds, real estate, commodities, etc. are unimportant by themselves and simply serve as a means to an end. They are nothing more than tools.
Our primary objective is the pursuit of positive absolute returns. Beating or lagging a particular benchmark is irrelevant. If the market falls thirty percent and your portfolio only declines by twenty-five percent, this relative outperformance is not reason for celebration. By the same token, if you are making acceptable progress toward your goal, the fact that you may have lagged any one of literally dozens of abstract market indexes is meaningless. These comparative measurements tend to distract us from truly important objectives.
Our process has three major points of focus:
- Risk management. Sometimes the best approach to a particular asset class is to avoid it completely. We use a simple quantitative process to help identify conditions that offer a statistically low probability of success. When these conditions are identified, we eliminate exposure to that investment. This is not an effort to time market tops or bottoms, but rather an attempt to avoid substantial loss and uncomfortable portfolio drawdowns. We have a very specific, rules-based criteria that defines both the exit point and the ensuing re-entry.
- Position management. No reasonable investor expects perfection. Losses are inevitable. If we accept that reality, then it is only logical that a strategy should have rules designed to limit the damage of losses while allowing winners to grow unconstrained. We employ a unique approach to managing portfolio risk that fosters this lopsided relationship between the size of gains relative to losses.
- Diversity of opportunity. Our portfolios, when fully invested, will typically have exposure to both foreign and domestic stocks, bonds, real estate, commodities and alternative strategies. Although these assets may be expected to act differently from each other, they often act in concert – especially in times of stress. Diversification does not assure a profit or protect against a loss in declining markets. We diversify primarily for upside benefits. For downside protection, we take a more active, hands-on approach.
I invite you to call at your convenience for a more detailed discussion of our approach and how it might work for you.
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