The 1980 US Olympic Committee expected coach Herb Brooks to select players based on the traditional methods. Their plan was to invite a large group of the best college hockey talent in America (according to committee consensus) to a tryout. This routine is similar to subjecting individual investors to risk tolerance questionnaires. In our opinion, both systems ignore the essential attributes needed to win a team sport at the Olympic level.
According to Dr. Phil Demuth, a clinical psychologist and investment advisor, “Even if risk tolerance existed and could be measured accurately, why would it be an important factor when considering how to invest?” More to the point, who would want their maximum risk tolerance imposed on them anyway? Yet, these questionnaires are part of the industry’s fiduciary standard.
Herb Brooks did not choose his offensive strategy or players with arbitrary tests, and neither do the advisors at Affluent Capital. We recommend investment strategy based on the variables we know about and can control. This starts with an explicit definition of what it means to win – cash flow. It continues with the most efficient strategy – sequence of returns. It is implemented with the players that are historical winners for executing the strategy - correlation.
Our scoreboard is our client’s Funding Status – confidence. Herb Brooks chose players with the offensive attributes he needed because he knew that winning is not the avoidance of losing. For us, dollars of future wealth are not the avoidance of poverty. While there is a physical opponent in the world of sports; for investors, the opponent is irrational thinking and methods, not ‘the market.’
For rational investors, risk capacity helps determine strategy, not risk tolerance. While risk tolerance surveys are conducted in a psychological vacuum, risk capacity is determined by balancing all essential factors into a coherent structure. The relevant tool is our Facts and Values Matrix, a conversation piece that integrates the facts of reality with our client’s unique values. We believe that this is radically different, and reliable - which is also radically different.
For Affluent Capital advisors, the investment strategy decision is the most conservative one our clients can afford. It is the asset allocation that can give them a high probability of success while helping to avoid unnecessary sacrifice or risk. After all, risk capacity, like an investor’s assets, is the wealth our advisors are entrusted to manage.
Like Coach Brooks changes players on the fly for tactical advantage rooted in strategy, we are flexible with strategy rooted in the facts of reality. If our client’s status becomes overfunded or underfunded, we adjust cash flow objectives or risk exposure, and rebalance to our desired confidence level. While Brooks’ players are the talent on the ice, ours are the entrepreneurial capitalists whose companies our clients own in their investment accounts.
They are the ones who actually take risk, manage companies, and create wealth with their minds and energy. The profit earners are the essential producers in whom we invest, and their entrepreneurial spirit is how we make the investment strategy decision – create the vision, take calculated risks, design to avoid mistakes, and measure success at the Olympic level.
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The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. There is no guarantee that any strategies discussed will result in a positive outcome. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. Past performance is no guarantee of future results. Asset allocation does not guarantee a profit or protect against loss.