5 Truths to Take Back the Wheel: Is Your Portfolio Driver-less?

AAEAAQAAAAAAAALlAAAAJDk2MmFkMjNjLWI4NjctNDY2NS04ZDgzLTlhZGM2YzY5MjEyOA
Steve Jurvetson via Flickr

Riding in the back of a Google robocar is probably thrilling! Now imagine your family, your business, and your hard-earned assets shaken side-to-side with sole reliance on a machine. Financial advice can often times focus on the rear-view mirror, drive the same speed for all passengers, and suffer from numerous blind spots when it comes to risk management.

Machines Can Break & Markets Can Bust Through the Cones

  • The #NYSE (New York Stock Exchange) was halted from 11:32 AM to after 3 PM on July 8th due to a computer error.
  • United Airlines issued a statement saying it suffered from “a network connectivity issue this morning” that grounded 4,900 flights worldwide.
  • The #ChinaMeltdown in equities has more than 50% of A-share listings halted for volatility. Since June 12, the Shanghai Composite has lost an unnerving 32%. The Shenzhen market, which has more tech companies and is often compared to America’s Nasdaq index, is down 41% over the same period.
  • Resolutions for #Greece have strong implications for the euro zone and contingency plans for larger neighboring countries. Importantly, what avalanche could this snowflake unleash?
  • Second-quarter earnings reporting season is set to ramp-up in a few weeks. Volatility and surprises are sure to come even as bottom-up operating earnings estimates for 2015 ($115.5 per S&P) have already dropped double-digits since the beginning of the year with an implied above-average multiple of 18X.

Take Back the Wheel or Hire An Experienced Driver

Global central banks, regulators, and governments are constantly manipulating the course and the rules of the road. Whether you are a fiduciary agent or an individual investor, please seek a powerful combination of smart decision-support tools and human wisdom to help navigate the potential bumpy environment ahead.

Radar Charts are a great method to easily visualize portfolio attributes. Below is a generic illustration I created in two minutes with Excel to view credit risk and interest rate sensitivity scores for different fixed-income groups. You could do the same for “Comfort-Score,” Forward Price-Earnings Ratios, Expected Yield, and other easily obtainable data items.

1) Rear-view mirror: Modern Portfolio Theory, historical standard deviations and 5-Year Betas are only useful starting points. Like a family budget or business proforma, portfolio stress testing and awareness should use a majority view through the windshield. You do not have to outguess the stock market or own a crystal ball on interest-rates, inflation, or economic growth to know what investments you own, why you own them, and the most likely sensitivities under different scenarios. Taken a step further, you can assign a probability structure like 50% confident interest rates stay the same and 25% each to interest-rates jump or interest rates retreat again.

2) Differentiation: Plan Scores and Probabilities of Success produced by finance software serve as great baseline assessments and help to facilitate deeper conversations. However, be wary of any tool, product, or advisor that claims an ability to properly and holistically gauge your comfort “speed” in just a few standardized questions. Your age, planned retirement date, and view that you “wish to make as much money as possible without experiencing a historical market drop” is rarely a view complete enough to evaluate your portfolio needs.

3) Risk Management: An experienced driver has proven techniques and disciplines to manage varied roads, traffic, and driving conditions. Here are five categories important for my family of passengers.

Seek Five Truths To Protect Your Hard Earned Money 

  1. Stewardship: A business culture based on a higher order of care that originates from a passion to serve and protect the long-term well-being of others. Even the trend of marketing “legal fiduciary” has gotten jaded when disclosures and conflicts are buried in the paperwork and the advice model still favors business-centric decisions. This is probably the most important and sometimes the most difficult to ascertain by those outside the financial services industry. Do your homework and start here!
  2. Integrated, Goals-Based Wealth Management: Builds collaborative long-term and shorter-term trading road maps on the foundations of a client’s unique and multifaceted goals, constraints, preferences, sensitivities, legacy holdings, financial wherewithal and emotional elements. How many other investors have the exact same portfolio as my family? 
  3. Proactive Asset Management: Defines “Style” as agile and flexible with an approach to evaluate rewards and risks. Will use passive & active strategies, strategic & tactical allocations, and quantitative & qualitative assessments where and when most suitable. Are my investments always an up-sized or downsized version of my previous holdings even when analysis reveals opportunities to target specific buys and sells that could improve my portfolio, tax situation, or risk profile?
  4. Humility: While considered an expert, the experienced driver is willing and able to admit mistakes or seek input from other seasoned professionals. Able to pivot unemotionally with the client’s financial interests taking precedence over the pride of the professional and the firm.
  5. Uses Technology to Implement Strategies–Not Sell Products: Faster, smarter, and prettier tools are available to empower clients and advisors throughout the four primary phases of wealth management (Discovery, Planning, Implementation, and Monitoring). Unfortunately, technology also enables product-steering, standardization, and mass distribution of advice. Slick reports, colorful pie charts, and mesmerizing statistics can also provide cover for lack of expertise and the effort put forth on your family’s behalf. Honestly, excluding the 24 hours before this review meeting, when was the last time you looked at my portfolio? Why does this tool always recommend your firm’s proprietary funds?

I welcome your thoughts in the comments section below. 

ABOUT THE AUTHOR:

Michael loves to empower investors with his expertise in securities and economic analysis, goals-based wealth management solutions, and FinTech smart decision-support tools. While directly managing over $5 billion in growth and retirement assets; his proactive advice and software innovations have influenced thousands of fiduciary advisors to better their practices and service to clients. He enjoys spending time with his wife and three boys, competing in USTA tennis, and mentoring others to succeed.

Email | Michael@empoweredportfolios.com
Twitter | @MichaelHakerem

Advertisements