The common wisdom among many traditional money managers is that ‘beating the market’ will improve the lives of individual investors. In addition, their common wisdom is that alternative asset classes, active management, market forecasts, and risk tolerance questionnaires are necessary tools.
All of this presumes that analysts and forecasters possess superior knowledge, and to prove it, they offer complex solutions. Yet, if wisdom is a function of knowledge and experience, and knowledge is a function of perception and logic, does any of this really work in practice? In our opinion, under stress, it all falls apart.
So, what could be reliable? At Affluent Capital, our advisors start with the philosophical principle known as Occam’s Razor. It teaches that frequently; the best solution is the one with the fewest assumptions.
At Affluent Capital, our advisors achieve simplicity by focusing on the assumptions we know about and can control. Primarily, we balance spending goals, savings habits, financial resources, and life expectancy with risk exposure. We then model them against the uncertainty of the future. The result is our investor’s confidence level, on their terms, for living the one life they have with purpose.
In other words, our advisors apply reason to the evidence of reality. In a similar fashion, when Herb Brooks was hired to coach the 1980 US Olympic hockey team, he was facing the reality of Soviet dominance. The common wisdom in international hockey, was that in order to beat the Soviets you had to defend their prolific offense.
Brooks knew, that under stress, this tends to fall apart. Instead, he selected players based on their attacking skills, and he used the evidence of game film to gain this knowledge. He then devised the strategy that would give his team the greatest probability of success. He also knew that he needed a defensive strategy, that under extreme conditions, could adjust to the inevitable barrage of Soviet shots on goal.
At Affluent Capital, defense is the purpose of our advisors' allocation to fixed income securities. This is because our equity allocation is our offense, and its one key variable we can control. In other words, high quality bonds can be the goaltender defending stock market volatility, particularly under extreme market conditions.
Unfortunately, the common wisdom of asset allocation, manager selection, market timing, and ‘stay the course’ can ignore the solution with the fewest assumption errors. This is because some traditional performance benchmarks are a blend of arbitrary indexes, not the life of the investor.
In order to minimize the possibility of failing under stress, our Advisors perform regular Stress Tests for every client. The result is their Funding Status – their confidence level for meeting or exceeding their lifestyle spending goals. It also identifies the easy-to-understand investment strategy that helps avoid unnecessary sacrifice and risk.
Having the knowledge of a forward-looking Funding Status - one rooted in the facts of reality, personal aspirations, and prudent action, allows Affluent Capital investors to take ownership of their futures. Together, we anticipate the possibility of extreme events, make informed decisions, and help clients live the one life they have with confidence.
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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. As with all investments, past performance is no guarantee of future results. No person or system can predict the market. There is no guarantee that any strategies discussed will result in a positive outcome. All investments are subject to risk, including the risk of principal loss. Neither asset allocation nor diversification guarantee a profit or protect against a loss. The bond market is volatile and carries interest rate, inflation, liquidity and call risks. As interest rates rise, bond prices usually fall, and vice versa. Change in credit quality of the issuer may lead to default or lower security prices. Any bond sold or redeemed prior to maturity may be subject to loss.