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What are the Contributors to Client Performance? Choosing the Right Investments

What are the contributors to client performance?

3. Choosing the right investments

This is the third post in our “What are the contributors to client performance” series.  The first contributor discussed the importance of finding the right asset allocation.

Today’s article is important because it focuses on what happens after you’ve selected your asset allocation.  How do you go about choosing the right investments to fill in your mix of cash, fixed income, and equities?

Our belief is that, as an investor, you can take big risks to try to outwit the market, or you can look for investment solutions that you can feel confident in year in and year out regardless of the economic environment.

With that in mind, we consider four criteria when evaluating managers and their appropriateness for client portfolios.  Those variables are as follows.

  1. Patience
  2. Discipline
  3. Diversification
  4. Correlation

Let’s look at each of these one by one.

Patience:  Why is patience so important?  The advance of technology has created a culture that has become used to getting things instantaneously.  Investment success doesn’t work that way because technology can’t control when the market goes up or when the market goes down, nor can it control human behaviour.  As a result, we’re not looking for managers who need instantaneous high performance to prove how smart they are.  Those managers worry us because we believe they take significant risks by following short term trends instead of adhering to a discipline and being patient enough to allow their approach to work. 

Discipline:  In our mind, discipline is a very simple concept; however, not always easy to execute.  Consider your plans to work out three times a week.  It’s usually quite easy to do for awhile, but then something happens, you miss a week or two, and then suddenly you’re not working out anymore.Sound familiar?  The same applies to investing and investment managers.  We look for managers that have an investment philosophy and discipline that they adhere to at all times through good and bad markets.  You may be familiar with terms like value, growth, or momentum as investment strategies, and many managers we look at may adhere to one of those philosophies.Their philosophy or ‘style’ does not concern us, as we can address different styles through diversification.Our most important concern is that, whatever their style, they’re disciplined enough to stick with it regardless of current market conditions.

Diversification:  It has been said that “concentration” makes you wealthy, while “diversification” keeps you wealthy.  Business owners and executives understand this.  They have so much of their financial well-being tied up in the ownership of their businesses or the stock of the company they work for that they expect the value of that business to be their main provider for their financial future.    It also puts a lot of risk in one place.  Diversification, literally means spreading your investment dollars around, or in other words, not having your eggs all in one basket.  Diversification means owning a number of different strategies with the goal being that should one strategy suffer a setback (or worse); your whole financial future isn’t jeopardized.   When we look at different managers for your portfolio, we’re interested in diversifying the individual securities they select to eliminate portfolio concentration.We’re also interested in diversifying geographically, by style (value, growth, momentum), and by sector (financials, energy, technology, heath care, etc.).

Correlation:  Finally, we look for investments that behave differently from one another.  Staying invested is such a crucial element of long term investment success that managing the highs and lows of market volatility can be quite important.  One thing that we know is that certain investments tend to do well, when others are struggling, and vice versa.  When we look at different managers for our portfolios, we want to have managers that are uncorrelated, or certainly less correlated.This means that we’re looking for managers whose performance behaves differently depending on economic conditions.This way, volatility throughout the portfolio is reduced.  This becomes increasingly important as clients move towards, and into their retirement years. 

In conclusion, manager patience, discipline, diversification, and correlation, are all important elements we look at for successful portfolio development, once a desired asset allocation has been set.  At LGK Wealth Management, we are always reviewing our managers to ensure that they adhere to the criteria laid out above.  By following this mandate, it ensures that, even during difficult or challenging investment markets, our portfolios are, like the old Ford commercial, “built to last.”

Call 1-780-426-2400