3 Principles, 1 Realization on Portfolio Building and Putting the Client First

Tropical Storm Lee is dumping on our state and the stock market isn't looking too sunny either. August was not particularly kind with the Dow Jones down about 4.5% for the month. As I mentioned previously, I moved over 80% of my clients assets to my Low Volatility portfolio a few months ago. It lost 0.60% in August. I'll take it. 

There are three basic investment principles to which I adhere and one realization. The three principles are:

  1. Seek to minimize losses;
  2. Seek to minimize fees;
  3. Diversify. 

Diversification can mean different things to different people. To me, it is not a blind "spread it across all asset categories" approach. Although this is what I was taught in the early days of my career, I hold to a modified version of this. I choose to invest in the categories that I believe hold a better-than-average chance of yielding a positive return. I also measure diversification mathematically. In other words, I quantify the degree to which a portfolio is diversified. Therefore, it's not an abstract belief, but a definitive result. 

I mentioned the word, "realization." Here's what I mean. I invest in many different categories, but cannot possibly keep up with every nuance in every category. Therefore, I attempt to identify managers who have demonstrated excellence in their particular area. For example, let's take the currency markets. To properly understand what currencies to hold long and which to short, it would require a full time, highly trained analyst. Though I believe I have a good understanding of what affects the fluctuation of a country's currency, I do not possess the expertise, nor do I have the time, to stay abreast of this dynamic market. Therefore, I choose to use a manager who follows this 24/7. It's the argument of the "Generalist" versus the "Specialist." In a face off, the Specialist should win every time. 

Another part of the realization is that I realize I don't know it all. Often, advisors feel like they are expected to have all the answers. This correlates well with the axiom, "The more you learn, the less you realize you know." When an advisor reaches that place in his life when he understands what he does best as well as his own limitations, the advisor is in a much better position to serve those who have entrusted their life savings to him. 

Let's continue to earn trust, no matter what the cost to us personally! Put the interests of the client first! 

Thanks for reading and have a great week!

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