Risk Controlled Investing

When you stop to realize that most of the popular indexes of domestic stock prices are still well below the highs set in 2000, you know that investing has been tough for a long time. It is not getting any easier. Combined with the fact that money market funds and bonds offer puny yields, it is obvious that the old standard idea of asset allocation simply does not offer a reasonable probability of building a retirement income.

That is why we believe that a third dimension of allocation is needed. The standard approach calls for diversifying by asset class, such as domestic stocks, foreign stocks, bonds and cash. Then diversifying within each asset class by using multiple securities. This is a great first step, but is not likely to provide a satisfactory risk-adjusted return in a low-yielding, range bound investment climate. We need to add strategies that are focused on taking advantage of these very weaknesses to seek profit. We call this the third dimension of risk-controlled investing.

Strategy Allocation

Few individuals or even professional advisors are capable of doing this by themselves. No single advisor or strategy is likely to have the expertise to succeed in all economic environments. For example, a manager who performs exceptionally well in a strongly rising stock market is unlikely to do as well in a sharply declining period when we need the most help. So, for most of us this means utilizing a number of specialized money managers with strategic and tactical methods that profit from various market scenarios. We refer to this as “hiring smart people to do smart things.”

Rather than assume that we can be “all things to all people in all markets” we are constantly reviewing and selecting proven money managers that have complementary skills. By combining these in an intelligent manor we can develop a third level of allocation, a strategy allocation. This could further diversify risk and offer an opportunity for improved profit potential.

We believe the key to investment success in crazy markets is to adapt to the changing circumstances. Begin by conceding that no one source can cope with all the complexities and broaden the range of expertise applied to your investment management. We refer to this approach as Adaptive Value Investing.