How to manage money in an uncertain world

The capital markets are inherently uncertain. We financial and investments practitioners engage in all kinds of research, analysis and innovation to help manage this uncertainty. And the industry has made massive strides in creating a framework for understanding better the drivers of uncertainty and for managing the potential for bad outcomes within our clients’ portfolios. Here is a partial inventory of some of the major insights and tools created over the past 75 years: 1) The Capital Asset Pricing Model, 2) Mean-Variance Portfolio Optimization, 3) Value at Risk (VAR) analysis, 4) The Black-Sholes Option Pricing Model, 5) Automated Trading, 6) Indexation, 7) Hedging, 8) APT Multi-factor models, and 8) Securitization. Together, all these things conspire to provide better portfolios for investors. Nonetheless, despite our collective progress, one truth remains: we still have uncertainty. We can now better manage against the potential for uncertainty (and bad outcomes) but we cannot eliminate uncertainty. It is an immutable reality: Investment ALWAYS includes a degree of uncertainty. This is the reality we all face together.

We at WealthPlan understand this reality and have created a series of portfolios with many different potential inputs that help us to manage uncertainty while we place our investors’ assets in a portfolio that best suits their unique situation. These portfolios include a full spectrum of optimized mixes that run the gamut from lower risk to higher risk. To build these portfolios we incorporate computers, data, and software that allows us to design and build durable strategies. We conduct proprietary research and analysis to identify securities or outside money managers that we believe offer unique opportunities to add value with a compelling risk/reward dynamic. We make use of individual stocks, mutual funds, and ETFs to build our clients’ portfolios. We also use software tools to assess each client’s unique needs and circumstances as well as their unique tolerance for risk and for potentially bad outcomes. We feel confident that all these things help us lead clients to a portfolio that is suited for them. But, for all the thorough and thoughtful work we do, we cannot eliminate uncertainty or the potential for bad outcomes.

What are some of the elements of uncertainty that we can’t eliminate? Here is a partial list of the types of things that simply cannot be predicted and thus cannot be managed:

  • Wars and Conflicts,
  • Terrorist Attacks,
  • Financial Crises,
  • Recessions,
  • Election Outcomes,
  • Flash Crashes,
  • Acts of God (hurricanes, earthquakes, etc.), and
  • Acts of Fraud.

Not only can we not predict the occurrences of the things above, but we also cannot forecast how the markets will respond to them if or when they do occur. We also cannot forecast governmental response to their occurrence. It’s just a big amalgam of uncertainty. So, what we have are a bunch of bad things that could happen, and no way of knowing in advance how markets will respond if they do happen. What, then, can be done? 1. Diversify. Diversify by asset class, by asset type, by asset strategy, by money manager (to diversify the “thinking’), and by economic sector. Basically, hold a lot of stuff in your portfolio. 2. Dollar cost average. No matter what is going on, if you are not yet retired, you can buy a little on some calendar periodicity (monthly or quarterly) to smooth out your costs and outcomes. 3. Extend your time horizon. 4. Be prepared to change plans if something bad happens. Be prepared to save more, spend less, or work to a later than planned age. All these things may need to happen if an unforeseen bad outcome manifests. 5. Use downside protection strategies. These aren’t for everyone because you give up some downside, but they can be appropriate for some investors, particularly those in or nearing retirement.

If you want to have a deeper conversation about your portfolio and the various things that can be done to manage the inherent uncertainties involved in investing, we’d be glad to help you.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which Investment(s) may be appropriate for you, consult your financial advisor prior to investing. Information is based on sources believed to be reliable, however, their accuracy or completeness cannot be guaranteed.

Dollar-cost averaging is the process of investing a fixed amount of money in an investment vehicle at regular intervals, usually monthly, for an extended period of time regardless of price. Dollar-cost averaging does not protect against a loss in a declining market or guarantee a profit in a rising market. No investment strategy can assure success or completely protect against loss, given the volatility of all securities markets. Statements of forecast and trends are for informational purposes and are not guaranteed to occur in the future. All performance referenced is historical and is no guarantee of future results. Securities investing involves risk, including loss of principal. An investor cannot invest directly in an index.  

The information in this communication applies solely to the intended audience and in no way amends, revokes, or otherwise alters the existing agreements and relationships between WPIM and its clients.  This communication is not a binding offer, expressed or implied.  WPIM undertakes no obligation to update or revise the information herein or in any referenced third-party resource due to new information, future events or circumstances, or otherwise.

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