How to Defend Your Client’s Portfolio

The last 9 years have been historic. Markets have covered a big spread. From the low in 2009 to the current highs in October 2018 we have been able to see a historic rally in US stocks. An anticipated business friendly government along with years of stimulus and historically low rates have driven US markets to new levels. Whether or not this will continue one must think and pause to imagine what is next in store for us.

To make a comparison to something that touches all consider how you protect your family with a life insurance policy for yourself. Just in case the unthinkable happens. As we humans live longer insurance on life becomes cheaper all other things being equal. As volatility decreases similar term insurance for the stock market becomes less expensive. When markets are in a panic and everyone is selling this same insurance becomes more expensive.

Diversification provides insurance. Stocks and bonds don't correlate together in many instances and diversifying globally and in alternative markets also provides some insurance. But when there is liquidity crunches and other contagions there is no relief. This is where insurance comes in handy.

It is important to consider keeping insurance policies for your clients portfolio especially when they are cheaper along with insurance for your life. As markets move up and create wealth those that protect their wealth strategically sustain themselves and get through any surprises.

Protectio Investments is built to help institutions and financial advisors protect and grow their portfolios managing risk and opportunity.

We would love to work with you to defend and help sustain your portfolio.

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. 

Investment Operations value to Advisor Standard of Care

As advisors look to differentiate and add value for their clients there is often an urgency at times to improve Advisor Standard of Care. Standard of Care provides the foundation for the service engagement between a financial advisor and his/her client. From a regulatory perspective if the advisor is a registered investment advisor (RIA) or a broker dealer representative then the Standard of Care is often either Fiduciary or Suitability. Although each particular advisor is unique, in general broker dealer representatives are held to the suitability standard and registered investment advisor representatives are held to the fiduciary standard.

The suitability standard allows broker dealer representatives to offer products for suitability from the products the broker dealer carries. The representative is paid a commission. The fiduciary standard demands the registered investment advisor representative offer the "best advice" taking into account the needs and situation of each individual client. The investment advisor representative is paid with fees unrelated to the portfolio products the client is allocated to. With the new Department of Labor ruling there is a stricter standard for (ERISA) retirement accounts where all advisors (both RIA's and Brokers) are to provide fiduciary standard for ERISA accounts. This leaves no room for not acting in the best interest of client.

Advisors that develop investment operations are able to provide a Standard of Care well above regulatory requirements and are able to grow their business at a faster pace then those that don't focus on it.

Highly responsive, efficient, reliable investment operations creates opportunities from threats facing advisors. In an environment of increased competition, complex and shifting regulatory environment there is a demand for more transparency for delivering value to clients. There is pressure to reduce costs, improve margins and threats from technology and sophisticated clients that demand more.

Protectio Investments is able to work with financial advisors in the background with trust and confidentiality. Our strengths include improving investment operations, client reporting, portfolio management, portfolio design and successful complex project management. Some of the systems and processes we implement, integrate, improve, support and help advisors make sense of include:

Portfolio Management Systems - Experience deploying, training, and best practices using Black Diamond, Schwab Portfolio Center, Tamarac, Morningstar Office, Orion, Albridge, BlueLeaf, among proprietary systems and others.

Client Relationship Management (CRM) Systems - Experience deploying, training and best practices using Junxure, Redtail, Salesforce, Microsoft Dynamics, Tamarac CRM , Salentica among others.

Financial Planning Tools - Experience deploying, training, and best practices using MoneyGuidePro, eMoney, MoneyTree, Advicent/Naviplan, Advizr, Right Capital, Finance Logix among others.

Document Management Systems - Experience deploying, training and best practices using DocuSign, Laser App, Laserfiche, Worldox, NetDocuments, Docupace, among other in house or cloud storage solutions.

Investment Analytics - Experience deploying, training and best practices using Morningstar, YCharts, Hidden Levers, Advisory World, RiXtrema, FactSet, among other solutions.

Trading/Rebalancing Systems - Experience deploying, training and best practices using Tamarac, iRebal, Total Rebalance Expert, Trade Warrior, Red/Black, FolioDynamix among others.

Client Portal Systems - Experience deploying, training and best practices using eMoney, Modestspark, Sharefile, Tamarac, Everplans, Oranj, Wealth Access among others.

Risk Tolerance Systems - Experience deploying, training and best practices using Riskalyze, FinaMetrica, Pocket Risk, among others.

Client Data Gathering Systems - Experience deploying, training and best practices using Precise FP among others.

Investment Due Diligence - Experience deploying, training and best practices using Fi360, Morningstar Direct, among others.

Our Experience: We have worked with many Wealth Management and Financial Advisory firms and can provide references. By working with us we can implement best practices and match your advisory business with the best fit tools.

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction, software platform or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, software platform, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. The software platforms above are owned by their respective firms and Protectio Investments works as a consultant to financial advisory and wealth management firms to implement, identify and determine best fit.

What is Smart Beta and how to harness it?

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Smart Beta strategies are growing in popularity as they offer another option in the passive and active investing debate. Smart Beta ETFs have grown in popularity with investors and financial advisors as they create opportunities for fee saving with sensible investing that is present in active management. Smart Beta strategies use historically tested rules to invest and get market (beta) exposure. Many Smart Beta strategies try to invest in value stocks as they are often considered better than expensive stocks, others focus also on small companies as they historically outperform large companies. Other Smart Beta triggers are low volatility, high dividend, trend, among other factors that are reflective of good companies.

The growth of Smart Beta ETFs and other Smart Beta products have grown tremendously as investors, advisors and institutions scour for returns to beat benchmarks. It is an easy choice to allocate to Smart Beta as it can solve the active and passive debate to lower costs. The only problem is that when portfolios are designed to chase performance instead of fundamental investing to achieve a specific purpose there is a risk of unexpected outcomes. Smart Beta when using indicators like momentum and buying a stock because it has gone up is very dangerous as it does not consider anything about the stock. Buying a stock just when it goes up is similar to investing in managed funds after they have shown superior results. Chasing performance more often than not leads to poor performance. Performance is created through analysis, design and an approach that is consistent.

We believe there are better designed portfolios then Smart Beta. Buying stocks because they go up is dangerous especially if you are in the top of a bubble. Many other indicators can lead to poor outcomes when used in bulk without proper analysis and research.

There is value to work with a portfolio manager that will protect you and your portfolio by understanding the flaws of Smart Beta and other factors. We would be happy to talk with you about your portfolio. 

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. 

Understanding Modern Portfolio Theory and its Flaws

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Modern Portfolio theory invented by Harry Markowitz in 1952 is used by portfolio managers to aid asset allocation decisions by constructing portfolios to optimize expected return based on a level of expected market risk. The theory constructs an "efficient frontier" offering possible expected return for a given level of risk. This theory is applied by most financial advisors and portfolio managers. The allocation targets used by most wealth managers, robo-advisors and portfolio managers utilize these theory to determine portfolio construction. This theory is very attractive because of its simplicity. The complexity of investor goals and objectives are converted to expected risk and return statistics which make application quite easy.

 

Is this the best way to go? Sometimes easy and simple solutions work and should be followed. Other times they are too dangerous and need to be ignored. And then there are times when simple solutions should be followed to provide starting point but with a thorough understanding of the flaws the final solution can be created. As I develop asset allocation models for my clients I develop them with a clear understanding of the limitations of Modern Portfolio theory and create safeguards that will help the client create opportunities while controlling risk.

The construction of a portfolio using Modern Portfolio Theory rests on many inputs and assumptions. First the return and volatility inputs that are used need to be accurate. For the sake of convenience many managers use historical data for these input parameters as forecasting data is difficult. The applicability of historical data can be suspect as we have seen shifts in our lifetimes. Second, there is an assumption by the theory that financial markets are efficient. I will not debate this pro or false but I would say that they are not always efficient. There are times where we have experienced major dislocations in efficiency. Third, there is an assumption that participants in financial markets and investors are rational. This is another hotly debated topic. I you don't doubt this point consider election day 2016: When Trump was expected to win the market had an enormous down move but then buyers came in and started the big rally. Rational or not I would also say that it is not consistent. Fourth the theory assumes that financial transactions occur without cost or very little cost. The cost of transactions (borrowing, lending, trading, etc...) we have seen is often expensive based on bid ask spreads of securities and based on costs charged by intermediaries. There is also a lack of consistency in this assumption. Fifth in application of Modern Portfolio Theory there is a difference in utilizing more and less asset classes and how they behave with each other. Because of the relationships within different asset classes you have instances where portfolios designed are much different then optimal portfolio that the theory recommends. Sixth, Modern Portfolio Theory assumes asset prices behave "normally" as they have normal distributions. In reality we have seen that asset prices don't behave with a normal distribution. At times the tails are very fat and that means the likelihood of distorted events is a lot greater.

 

There is value to work with a portfolio manager that will protect you and your portfolio by understanding the flaws in the Modern Portfolio Theory. We would be happy to talk with you about your portfolio. 

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. 

Pascal’s Wager and Risk Analysis

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Blaise Pascal was a 17th century mathematician and philosopher that taught the world a few things about risk management. His famous wager teaches us about probability and decision making. The wager is a simple bet with risk and opportunity. Imagine you were making a bet on the existence of God. There is a cost for your decision and you have an outcome you have live with. If you wager that God exists then you will pray and do the rituals your religion requires and that is your cost. If you are right then you will see glory in heaven and reward for your choice of life. Now imagine that you bet that God doesn't exist. You spend your life as you wish. If you are right you did not lose any effort worshiping God. Now if you are wrong you may spend eternity in hell for your actions. The wager teaches us that sometimes even you are pretty sure everything will work out you should consider risk management and protect yourself. Because not believing in God and being wrong is a terrible outcome.

As we look at the markets and the rich history we have times and days that in hindsight look obvious but at the time were not very easy decisions. Imagine you invested in Japan in 1989. At the time this was an economy that was revered around the world. An investment then after over 25 years would be worth half the value. 

Imagine being a tech investor in 2000. Many firms went out of business and there was complete loss of value for the investors that chose wrong. From March 2000 to October 2002 the NASDAQ composite lost 78% of its value. 

Despite this awful performance there were opportunities like Amazon Inc. where shares have advanced from $1.50 in May 1997 to over $846 today March 2017-- a 56,000%+ return! Getting out in 2002 would have been regrettable. 

As markets move up and create wealth those that protect their wealth strategically sustain themselves and get through any surprises.

Protectio Investments is built to help investors, institutions and financial advisors protect and grow their portfolios managing risk and opportunity.

We would love to work with you to defend and help sustain your portfolio.

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. 

Should I go Passive or Active?

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There has been a healthy debate over the years of whether to structure your portfolio allocation with broad based index ETFs (passive) that track the market or specific funds (active) that try to beat their benchmark and the market. The cost of active is fees but the upside is alpha. Based on the manager, the sector and the fund company there are fees that are charged to the fund that reduce the return with expectation that a good manager can beat the market. 

Zachary Karabell wrote in Barron's "On a ten-year basis ending in 2013, 45% of active managers outperformed the index, and most of those barely outperformed, by less than 1%. Most of the underperformers also barely underperformed, by the same margin. Given higher fees, the conclusion of pure performance data is that one often pays active managers for index returns, and pays them considerably more than for passive funds." Why pay the fees when a majority of managers can't beat the market?

With years like 2011 and 2015 the market barely beat your savings account. There are always active managers that consistently outperform the market. The Warren Buffett didn't make his money investing in ETF's. Good managers are worth every penny in fees. The challenge is good manager selection. 

How should we play it? The best outcome is a hybrid model. Parts of your portfolio should be passive and parts should be active. Selection is not a function of chance but tested parameters. Good research, forecasting and back testing is critical to success and many portfolio managers out there just don't do it. There is benefit to have active exposures in some parts of your portfolio where a good manager will reduce risk and increase alpha. Working with Protectio Investments we will build a portfolio allocation that aligns with your goals and preferences and manages risk with opportunity.  We are portfolio specialists and would love to work with you.

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss. 

Protecting Portfolios using Options

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There are many ways to protect your portfolio from swift down moves in the market. Options provide a powerful tool to reduce downside risk in your portfolio. Most people won't hesitate to get a life insurance policy to protect their spouse or heirs but there is always hesitation when purchasing insurance for the portfolio. Like life insurance options have an expiration date with certain protections. The most common type of option used for downside protection is a put option. Consider the most simple scenario where you own a basket of large stocks that move for the most part with the Dow Jones Industrial Average. Your portfolio moves 1 to 1 with this major index. Instead of buying put options on each of your stocks you can buy put options on the index to protect your investment.

There are many benefits to buying options on some indexes. The biggest besides protection of your portfolio is the tax treatment. Some broad based indexes are treated with a 60/40 tax treatment. Whether or not if you have sold your position or held it for a very little time the capital gain at the end of the year is treated with 60% long term capital gain and 40% short term capital gain. Consult your accountant to understand the full details but this provides you great way to protect your investments.

With a wealth of Portfolio Management experience Protectio Investments is able to manage your investments to protect and sustain your portfolio.

Contact us today.

The content published on www.protectioinvestments.com does not constitute a recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person, business, or entity of any kind. Please consult us further concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter.  There is inherent risk in all investments and possibility for total loss.