The first of our Three Pillars is a Grow & Protect strategy constructed to manage investment accounts for our clients. It is designed to help you mitigate volatility, protect capital, and prepare for the unknown. This is where we have separated ourselves from the conventional wisdom developed in the 1950’s, which doesn’t recognize our global interconnected bubble-burst economy susceptible to immense conflicts of interest.
What Is Grow & Protect?
Grow & Protect is a capital preservation model with an offensive strategy. We’ve embraced this strategy because we do not believe in the conventional wisdom which says that investors should buy, hold, and hope for the best. Simply put, we prefer a tactical approach that tries to capture growth when the market is rising and protect capital when the market is falling. We use cash as a position to balance risk. In an advancing market cycle, cash levels will decrease as the portfolio becomes more fully invested. In a declining market cycle, we sell the investments and cash levels increase.
To illustrate, we start the process with our cash or equity positions. Each quarter, we run our fundamental filters to make sure we have the best, most appropriate holdings based on the stated style of each of our portfolios. A computer model then uses Dynamic Asset Allocation to determine when to buy each holding and how much to buy. As the market cycle advances, the computer model will balance risk by trimming some positions and adding others. When the market cycle turns negative, the model will issue sell signals. We then liquidate those positions and the process starts all over again. We do this position by position as well as by broad or niche asset classes. With this approach, we are able to make tactical investment decisions so that you are better positioned to weather shifts in the market and avoid steep portfolio declines.
The end result is a dynamic asset allocation model that takes advantage of asset classes that are growing while also protecting capital from asset classes that are declining. The conventional wisdom states that you should create a static asset allocation model based on your age and time to retirement. That static philosophy asks investors to absorb losses in any given asset class, but stay fully invested throughout all market and economic cycles.
If the investment and economic environment is in a low-growth, high-volatility period with great risk of loss, we prefer to hold cash rather than watch as that risk comes to fruition. We don’t tell our clients to hold on and wait for something to come back, since they might be left waiting for a long time. We keep our powder dry to reenter when the environment for growth and lower risk presents itself. This isn’t market timing―there is no system that can consistently call the tops and the bottoms. It is about capturing the middle.
Why Grow & Protect?
Our clients tend to be people who have done an excellent job of amassing great wealth. In some cases, they are non-profit organizations with important missions to help our communities. Others are relying on their hard-earned and saved money to maintain their lifestyle for the rest of their lives. Whatever their situation, we act in a fiduciary capacity to do everything in our power to do what is in the best interest of our clients. This includes not just a responsibility to try to grow their capital, but also involves protecting their wealth in order to help them work towards their goals.
Over the past six decades, we’ve seen four distinct market eras or cycles. Two of these periods were prolonged bull markets, with above-average returns with very little volatility. But the other two have been sideways markets with periods of high volatility. Volatile periods, like the one we currently find ourselves in, can be difficult for individual investors, who don’t have infinite time horizons to recover from losses.
Conventional portfolio management follows something called “Modern Portfolio Theory”. This theory was developed in 1952 and is based on a world, economy, and technology of the first half of the 20th century. The premise of this theory is that investment risk can be eliminated if a portfolio is built with a diversified series of assets. But as Andy Zittell likes to say, “When a 100 year flood occurs twice in 10 years, perhaps it isn’t a 100 year flood any longer.”
Our belief is that an active investment process like Grow & Protect is a useful strategy employed for all market cycles, but especially prudent for navigating volatile periods like the one we’re currently experiencing. A simple buy-and-hold approach just doesn’t work in this environment, and diversification alone won’t necessarily help to reduce risk. A more dynamic approach is required to help remove the peaks and valleys from a market cycle. With Grow & Protect, we’re able to adjust our position on the risk spectrum based on market conditions. If the market is advancing, we’ll reduce cash and be more fully invested. If the market is falling, we’ll increase cash levels and become more conservative.
No strategy assures success or protects against loss.
