Investing - Part 1
Lou and I acknowledge that investing is not one-size-fits-all.
If you haven't already, I encourage you to read our post, "The Right Fit". In it, I outline three client profiles that we tend to work well with. One key point is: "Generally, our clients are cautious about their wealth." Of course, some clients are comfortable with significant volatility in their portfolios. Generally, however, ours are not. Therefore, our advice and solutions are tailored to a more reserved investor profile. We have refined this approach over many years with this client base in mind.
In "Core – Surplus" I discussed the first step in our asset allocation process. We encourage clients to divide their wealth into two buckets: one for shorter-term needs and one for long-term investments. We believe everyone has different short-term funding needs; moreover, every family has its own risk tolerance. Thus, the percentage of one's wealth allocated to core and surplus is always customized for our clients. One family may have twenty percent of their capital in risk-free solutions and eighty percent in risk-on positions, while another might have forty percent in the former and sixty percent in the latter. You can easily see how adjusting these amounts up or down can significantly change one's overall asset allocation. To us, this is the most reliable form of customization we can offer.
Today, I want to start to discuss the long-term investment portion – one’s surplus capital.
There are four points we always highlight for clients and prospects.
1. As I wrote in “Long Term”, we always want clients to have a sufficiently long time-horizon for the money being invested in risk-on assets. For us, that usually means greater than ten years. We believe this is the best way to guard against unsuccessful investment outcomes.
2. Importantly, all our clients invest their surplus capital the same way. When I say “all our clients,” I mean exactly that. Lou and I view this as a key feature of our business for two reasons:
Efficient Portfolio Management: Running an investment portfolio requires significant time and expertise. Do you think an advisor has the bandwidth to manage four or five different portfolios effectively? We do not think so. Now consider whether an advisor can manage distinct portfolios for each client. This seems unwieldy at best and dishonest at worst. Therefore, we have chosen to concentrate all our intellectual resources on managing one investment portfolio exceptionally well. As a result, our clients are only invested in our highest conviction ideas.
Alignment of Interests: Lou and I invest our own money in the same way we advise our clients to invest theirs. Our surplus capital mirrors that of our clients, demonstrating our commitment and alignment with your interests. We believe it is more honest to share how we invest our family’s money rather than merely advising how you should invest yours. This alignment is very important to us; we are on this journey with you.
3. We believe that the best investment portfolio is one you can hold forever, rather than one you abandon at the wrong time.
For example, if a portfolio has an average ten-year return of twelve percent but you sell it in year four when it is down twenty percent, you won't achieve that twelve percent return; instead, you'll absorb a twenty percent loss. If you cannot stay invested when the portfolio is down twenty percent, you should not invest in that portfolio, especially if such volatility is likely. In nearly every instance, you would be better off investing in a portfolio that might earn seven percent on average but only drops ten or eleven percent during downturns if you are less likely to panic during those times. This way, you can realistically earn the seven percent average return by staying invested throughout your investment horizon.
4. Lou and I know that an important part of our job is managing the emotional journey our clients are on as investors. We are not traders and do not claim to have special insights for selling investments just before market downturns or buying back right before an upswing. In fact, we do not believe anyone can consistently time the market. Therefore, when we allocate your long-term investment portfolio, we need to ensure that you can tolerate the volatility that lies ahead.
Given how impactful volatility is to the investment experience, it is something we are always thinking about. To us, diversification is necessary to temper volatility. Thus, it is a key feature of our client’s surplus investment portfolio. Next month, we will discuss it in more detail.
If you have any questions or would like to explore a relationship with our team, please reach out.
The information contained herein has been provided by Fry Ormerod Wealth Advisory Group and is for information purposes[SI1] only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. Fry Ormerod Wealth Advisory Group is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
If you haven't already, I encourage you to read our post, "The Right Fit". In it, I outline three client profiles that we tend to work well with. One key point is: "Generally, our clients are cautious about their wealth." Of course, some clients are comfortable with significant volatility in their portfolios. Generally, however, ours are not. Therefore, our advice and solutions are tailored to a more reserved investor profile. We have refined this approach over many years with this client base in mind.
In "Core – Surplus" I discussed the first step in our asset allocation process. We encourage clients to divide their wealth into two buckets: one for shorter-term needs and one for long-term investments. We believe everyone has different short-term funding needs; moreover, every family has its own risk tolerance. Thus, the percentage of one's wealth allocated to core and surplus is always customized for our clients. One family may have twenty percent of their capital in risk-free solutions and eighty percent in risk-on positions, while another might have forty percent in the former and sixty percent in the latter. You can easily see how adjusting these amounts up or down can significantly change one's overall asset allocation. To us, this is the most reliable form of customization we can offer.
Today, I want to start to discuss the long-term investment portion – one’s surplus capital.
There are four points we always highlight for clients and prospects.
1. As I wrote in “Long Term”, we always want clients to have a sufficiently long time-horizon for the money being invested in risk-on assets. For us, that usually means greater than ten years. We believe this is the best way to guard against unsuccessful investment outcomes.
2. Importantly, all our clients invest their surplus capital the same way. When I say “all our clients,” I mean exactly that. Lou and I view this as a key feature of our business for two reasons:
Efficient Portfolio Management: Running an investment portfolio requires significant time and expertise. Do you think an advisor has the bandwidth to manage four or five different portfolios effectively? We do not think so. Now consider whether an advisor can manage distinct portfolios for each client. This seems unwieldy at best and dishonest at worst. Therefore, we have chosen to concentrate all our intellectual resources on managing one investment portfolio exceptionally well. As a result, our clients are only invested in our highest conviction ideas.
Alignment of Interests: Lou and I invest our own money in the same way we advise our clients to invest theirs. Our surplus capital mirrors that of our clients, demonstrating our commitment and alignment with your interests. We believe it is more honest to share how we invest our family’s money rather than merely advising how you should invest yours. This alignment is very important to us; we are on this journey with you.
3. We believe that the best investment portfolio is one you can hold forever, rather than one you abandon at the wrong time.
For example, if a portfolio has an average ten-year return of twelve percent but you sell it in year four when it is down twenty percent, you won't achieve that twelve percent return; instead, you'll absorb a twenty percent loss. If you cannot stay invested when the portfolio is down twenty percent, you should not invest in that portfolio, especially if such volatility is likely. In nearly every instance, you would be better off investing in a portfolio that might earn seven percent on average but only drops ten or eleven percent during downturns if you are less likely to panic during those times. This way, you can realistically earn the seven percent average return by staying invested throughout your investment horizon.
4. Lou and I know that an important part of our job is managing the emotional journey our clients are on as investors. We are not traders and do not claim to have special insights for selling investments just before market downturns or buying back right before an upswing. In fact, we do not believe anyone can consistently time the market. Therefore, when we allocate your long-term investment portfolio, we need to ensure that you can tolerate the volatility that lies ahead.
Given how impactful volatility is to the investment experience, it is something we are always thinking about. To us, diversification is necessary to temper volatility. Thus, it is a key feature of our client’s surplus investment portfolio. Next month, we will discuss it in more detail.
If you have any questions or would like to explore a relationship with our team, please reach out.
The information contained herein has been provided by Fry Ormerod Wealth Advisory Group and is for information purposes[SI1] only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual's objectives and risk tolerance. Certain statements in this document may contain forward-looking statements (“FLS”) that are predictive in nature and may include words such as “expects”, “anticipates”, “intends”, “believes”, “estimates” and similar forward-looking expressions or negative versions thereof. FLS are based on current expectations and projections about future general economic, political and relevant market factors, such as interest and foreign exchange rates, equity and capital markets, the general business environment, assuming no changes to tax or other laws or government regulation or catastrophic events. Expectations and projections about future events are inherently subject to risks and uncertainties, which may be unforeseeable. Such expectations and projections may be incorrect in the future. FLS are not guarantees of future performance. Actual events could differ materially from those expressed or implied in any FLS. A number of important factors including those factors set out above can contribute to these digressions. You should avoid placing any reliance on FLS. Fry Ormerod Wealth Advisory Group is part of TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc. which is a subsidiary of The Toronto-Dominion Bank.
