How do our choices get us to our goals?

Today’s world of “traditional investments” is anything but, traditional.  Stocks, bonds, and money market investments are the traditional staples of any investment management plan.  The important components of a plan restricted to these investments include (1) Asset Allocation, (2) Style (growth, value, income, capitalization size etc. domestic or international) (3) Quality (among bonds or stocks), (4) Liquidity, (5) Risk (principal risk, liquidity risk, buying power risk), and (6) Correlation (tendency to move in tandem).  By considering these issues and having a plan for them, one can make the outcomes of the investment process more predictable.

Consultants (some of our close friends are consultants) often rigorously follow much of the academic work that uses statistical models and “modern portfolio theory” to direct clients to index alternatives for active management.  While we like the low fees that index alternatives provide, and sometimes use them as components to our overall fund management strategy, they also have some weaknesses.  It takes 92 observations of quarterly results to statistically test whether a specific approach (managed) is statistically superior to an index.  That is too long for most committees whose terms are shorter than 20 years (typically) and other alternative selection procedures should be adopted.  The problem is that if you follow the academic logic, then we could never have had three one in a billion observations in the last two decades.  Obviously, the “bell curve” model isn’t the right one for the stock market or investments in general and there should be more open mindedness regarding the value of experienced practitioners in the field, especially when protecting one’s assets is a high priority.  When Hartline fills the overall investment consultant and management role, we join committee members in their fiduciary duties to act for the benefit of the fund.  Too often, the delegation of this task to a consultant leaves the committee with little control and a bias to do whatever the paid consultant says.  “Since we are paying them, we should follow their advice”.

There is no potential return without taking some risk, but knowing what risks are being assumed is important.  There are no guarantees in the investment world because they are ideas and not subject to the laws of nature.  There is also risk even if one doesn’t invest as when putting money under the mattress carries risk of theft, and money in a U.S. Treasury security, while the loss of principal risk is minimal, may not return enough to reach the financial goals that require a higher return.  Defining the risks that are reasonable and fall within the expectations of each client should be part of the investment process.

As the investment world becomes more complex, traditional investments have been divided into sub groups.  For instance, stocks or equity can be divided into large-cap, mid-cap, and small-cap referring to their capitalization size or total stock market value.  They can be divided between domestic and foreign and Private versus Public. Within the category of foreign investments, stocks can be allocated between “developed” markets or “emerging” markets in reference to the established countries versus emerging economies, including the currency influences of the specific countries.

There is really nothing simple about “traditional” investments and one quickly realizes that with a broad perspective, they include much of the investment universe even today.  We can help with a plan to allocate to these asset classes and expand the knowledge and use of them in ways that improve diversification and lower various kinds of risk.  Hartline has managers that have done it well for many years.