The Lifestyle Freedom Investment Approach
We have found that the portfolios managed by most firms represent an almost cult-like dedication to a given investment philosophy. Passive buy-and-hold advocates believe you need blinders and simply need to ride the ups and downs; active market timers claim that by getting in and out at the right time, the ride is much smoother; and the list goes on.
The reality is that all the philosophies can work at times, but there are times when they break down. Passive buy-and-hold is great long term if you can weather the cyclical downs, which is incredibly difficult for most people when those downs can represent a loss of 30%, 40% or more. On the flip side, while active trading approaches can potentially help you avoid those big losses, they can also be late to the game, so you might experience losses before getting out or miss out on gains when things rebound.
There are a few important criteria to consider when creating a portfolio:
The portfolio should provide a high probability of achieving realistic goals while also being aligned with the risk that one is able and willing to take (please note that what one is able to take and what one is willing to take are not always the same).
It should be easy to understand and adhere to sound investment management principles regarding asset allocation and diversification.
It should be designed so that it will not be abandoned during difficult times in the market.
It should be flexible enough to address changes in circumstances and needs over time.
It is clear that adherence to a single philosophy doesn’t adequately address all these considerations. With that in mind, we rewrote the rulebook and decided that we would meld the philosophies into a single portfolio. The Lifestyle Freedom Portfolios are comprised of the following components:
Passive & Active
This component of the portfolio is our answer to a longer term buy and hold portfolio with a couple twists. It is a passive portfolio utilizing exchange traded funds (ETFs) that provides global exposure to stocks and bonds. Since buy and hold does work over the long-term, this forms the core of the long-term portfolio. It is important to note, however, that this is not a “buy, hold and forget” portfolio. In addition to rebalancing this part of the portfolio to ensure that we are “buying low and selling high” over time, we also monitor long-term market trends (i.e., Dow Theory) to help determine when it might be appropriate to reduce market exposure with the intent on trying to avoid long-term market declines. For more conservative clients and certain clients in retirement who require exposure to stocks but who cannot withstand normal market fluctuations or for those clients who simply want hedged market exposure, we offer an option that provides for built in downside protection on this part of the portfolio. The downside protection “buffers” the losses up to 9% over the course of a year. In other words, if the market is down 8% for the year, the client loses nothing. If the market is down 10% for the year, the client loses 1% (the first 9% is “safe”). Since one cannot get something for nothing, the quid pro quo is that the upside is capped (typically around 13%, but pricing is determined on the date of issue).
We also have a more active or opportunistic part to our portfolios. At certain times when there are short-term “head winds” based on momentum, trading volume and other factors, this portion of the portfolio may be allocated to more conservative investments to provide an additional element of protection. At other times, it will be allocated to areas of the markets with perceived strength to take advantage of “tail winds”. Over time, it is our belief that this portion of the portfolio will provide additional downside protection and potential growth opportunities beyond those that can be obtained in a long-term passive portfolio.
Alternatives
Accredited Investors: Investing in private real estate, private equity and debt, oil and gas partnerships, etc. can provide additional diversification along with enhanced opportunities for gains and income. The trade-off is that these investments typically offer limited liquidity. To that end, these investments will only be considered for accredited and qualified investors who have sufficient resources to account for the liquidity constraints associated with these investments.
All Investors: Over the course of the last generation, the percentage of retirees who have access to pensions has decreased considerably. As a result, most retirees are now responsible for creating their own retirement income plans. While many are comfortable relying on their investments to provide them with sufficient income, there are others that desire a level of certainty in their planning. We work with these retirees to create pension-like income that they cannot outlive while still providing exposure to the markets so that they can augment and increase that income over time.
Have questions or want to learn more about how this applies to you? Use the link below to contact us!
