Atlantic Capital Management

Atlantic Capital Management (143)

Friday, 09 August 2013 00:00

Research Strategies for DIY Investing

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If you’ve spent any time searching for financial advice online, you’re surely aware that the Internet is replete with Squawkers, talkers, gawkers, and hawkers. From big-company websites to late-night infomercials, there is no shortage of available advice, opinion, and research. Giant financial services firms use it to sell their (highest-margin!) products and services, “unbiased” advice websites use it to drive clicks and sell advertising (usually for the giant financial services companies), content aggregators package and feed it through various social media outlets, and talking heads use it to make themselves look smart on TV. Some of this information is solid and valuable; some of it is not. Some of it is shockingly bad. Most of it is free; some of it is parked behind paywalls. On the whole, the widespread availability of financial research is a good thing for DIY investors, but the mind-boggling number of outlets and options can make even the most stalwart consumers scratch their heads in bemusement (and/or bang them on whatever hard surface happens to be nearby).

The value of personally researching financial instruments for your portfolio is (or should be) self-evident. After all, it’s your money, and if you’ve chosen the path of managing it yourself, it’s wise and prudent to understand as much as you can about how various instruments and markets perform. Markets change, strategies change, economic fortunes change, and risk is everywhere. Outside of partnering with a certified financial planner like Atlantic Capital Management, the willingness and ability to get down in the weeds and research your investments is probably the smartest move you can make if you’re going to manage your own money.

At ACM, we use high-level aggregate analysis of the five major market sectors (domestic and international equities, fixed income, real estate, currency, and commodity and cash equivalents) as the cornerstone of our research methodology, and we incorporate that analysis into all of our client interaction, individualized for every portfolio. (If you’d like to learn more about our investment methodology, you can do so here.) DIY investors sometimes partake in high-level analysis, but our experience shows that most DIY investors tend to focus more on the practical, tactile issues surrounding things like ratings, performance benchmarks, and sector trend analysis. With that in mind, we’ve prepared some useful tips for getting the most out of your research, which you’ll find below.

(As a caveat, we’ll take a moment here to mention that in general, we don’t subscribe to an investment strategy which is focused on “out-performance.” In our view, simply benchmarking against performance indicators doesn’t provide enough context for the management of a truly individualized portfolio. As we’ve said before, focusing solely on “out-performance” gets a lot of people in trouble, because the drive to artificially adhere to an arbitrary performance standard wreaks havoc with a risk tolerance strategy. In a lot of ways, an investment strategy focused on “out-performance” is a lot like stereotypically trying to “keep up with the Joneses.” Most of the time, your own grass is plenty green enough.)

Cross-check opinions and advice from various sources

Treat your research as due diligence. Invest the time necessary to cross-reference advice and opinions relevant to your risk tolerance, asset allocation, and performance strategies. You’ll find that a lot of investment advice, even from reputable firms, has a certain “flavor of the month” aspect to it. If a particular strategy catches your eye, and fits into your various profiles, double-check it for a consensus (or non-consensus) opinion. Try to find practical examples that line up with your approach and expectations. Where possible, directly solicit opinions from others.

Consider the source

Marketing is a necessary evil of the financial services industry. Unfortunately, so is hype. The industry is so crowded with players, big and small, that the penchant for trying to “stand out in the crowd” is prevalent even for the most conservative firms. The “big guys” have a relentless drive to churn out more new products and services every day. The “little guys” often follow along in an attempt to look bigger and more influential. The pundits and talking heads are tasked with capturing clicks, eyeballs, and viewers. Truly objective research is hard to come by. Our advice is to rely as often as possible on the “neutral” information sources like FINRA (Financial Industry Regulatory Agency). That’s not to say that good advice can’t be gleaned from the Charles Schwabs, Fidelitys, and INGs of the world, nor is it to say that the “boutique” investment firms aren’t providing good information, either. You may genuinely be able to gather some good advice from those sources. But remember, that research is designed to sell products and services, not necessarily to inform you on how to best manage your family’s nest egg. Be critical.

Consider paying for it

If you’ve chosen to bypass the services of an investment firm like ACM in favor of doing it on your own, you may want to consider paying for access to high-quality, less-biased (notice we didn’t say “non-biased’) research. Services like Morningstar Premium provide a plethora of “independent” research for a fairly low subscription fee (although you’ll still see plenty of ads for the big financial firms even behind the paywall).

Don’t rely solely on ratings

This is particularly true for equities. Ratings and “stock screener” tools are great for aggregating snapshot research into an easily-digestible format. But ratings and stock screeners are essentially a “one-size-fits-all” proposition. Use them to supplement honest, detailed, and relevant research and advice. Avoid the tendency to over-rely on dashboards and other simplistic widgets. Always make sure that what you’re seeing corresponds to your risk tolerance and overall investment strategies.

Doing your own portfolio research can be an interesting and engaging pursuit, albeit with some pitfalls and things to watch out for. Be wide-ranging, be critical, be diverse, and make sure you’re always benchmarking your research against your goals, strategies, and risk profile.


If you’d like to learn more about our high-level analytical process, we encourage you to contact us to schedule a free consultation today.

Tuesday, 30 July 2013 00:00

Risk Tolerance for DIY Investors

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“Only a very brave mouse makes a nest in a cat’s ear.” -- Danish proverb

The concept of risk tolerance, while fairly simple for most folks to grasp, is nonetheless a core foundational concept in DIY (do-it-yourself) investing that really shouldn’t be taken lightly. Many DIY investors give risk tolerance a cursory nod while putting together their portfolio strategies, or spend a little time online taking one of the generic risk tolerance surveys that can be found at various financial research and opinion sites. Younger investors often make the mistake of discounting risk tolerance altogether, rationalizing that large fluctuations in an aggressively risky portfolio can be “smoothed out” over time…after all, they’ve got a lot of years of working and investing ahead of them, right? Older, more established investors sometimes overlook the importance of risk tolerance because their asset mix is better developed; they may not worry too much about the risks inherent in their equity-heavy portfolios because they have other, more stable assets (real estate, for example) on hand. Fundamentally, both of these rationalizations are only partly problematic. Younger investors usually DO have more time to experiment with higher-growth, higher-risk investments. Older investors usually DO have a stronger mix of assets and/or higher income potential, mitigating the possibility of being completely wiped out by an equity-heavy portfolio that performs poorly in bad market conditions. The real issue at hand for DIY investors isn’t really tied to economic circumstances or station in life so much as it is tied to the willingness to withstand the emotional and mental peaks and valleys that come with investing hard-earned money in an industry that’s fundamentally, well…risky.


Our investment philosophy is first and foremost governed by processes and practices which put an emphasis on effectively managing risk. Beyond advising clients directly about the varying levels of risk tolerance that might be suitable for their purposes, all of our back-end processes are built with risk-managed investment firmly in mind. (You can get a good overview of our investment methodology by clicking here.) We strongly believe that no family, whether they are investing with Atlantic Capital Management, Inc. or striking out on their own, should throw caution (and money!) to the wind when it comes to evaluating the tolerance for risk. Below, we’ve outlined two important things to consider when formulating a risk tolerance strategy for a DIY portfolio.


What am I willing to lose?


Like it or not, this is the fundamental question at the heart of establishing a risk tolerance strategy. Given your current and predicted future income scenario, your lifestyle needs and expectations, and your personal willingness to hold off on pushing the “panic button” when things start to go south with your portfolio (as they inevitably will), what kinds of losses are you willing to bear while you weather the ups and downs? To put some real-life “oomph” behind this question, consider the following research from Wells Fargo: during the precipitous market decline from 2007 through 2009, equity portfolios and equity-focused retirement plans like 401(k)s lost a little more than 50% of their value. While many of those losses have been made up over the ensuing years, it was a long road back for many individual AND institutional investors. All things considered, could you withstand the loss of 50% of your equity positions? 20%? 10%? As food for thought, let’s revisit our “younger vs. older investors” scenario from above.


If you’re in your late 20s or early 30s, making headway in your career, and enjoying the benefits of having a two-income household, you might realistically be able to say that losing 50% of the value of a “high-growth” portfolio is something that you could withstand. (Although we bet you’d say it through clenched teeth!) After all, you’ve got a long road ahead of you, and “a rising tide lifts all boats,” as the financial pundits are wont to say. But what about your non-retirement investment strategy? What if the portion of your portfolio you were setting aside for your child’s education expenses dropped by 50% the year before you needed to access it? That would very likely make a significant impact on your plans to fund at least the first couple of years of college or private school. Under those circumstances, your tolerance for risk, which would normally be fairly high given your station in life, suddenly becomes a significant factor in potentially limiting an important life goal.


In the wake of the economic meltdown outlined in the research above, we heard many stories of people close to retirement age who watched with shock and dismay as the value of their retirement accounts plummeted. As mentioned above, it’s not uncommon for older, more seasoned investors to have a broader mix of assets that can serve as a shelter from the storm in times of crisis. Consider, however, the double-whammy of declining portfolios and free-falling property values, which affected nearly everyone in the wake of the 2007-2008 fiscal crisis. In Massachusetts, for example, average property values have fallen 15.7% since 2007, with many communities north, west and south of the city seeing declines as high as 39%. Suddenly, investors who were counting on weathering the storm by leveraging their low or no-mortgage real estate assets have a much smaller safe harbor than they originally thought they would!


Regardless of where you are in life or in your investment planning process, we can’t overstate the importance of asking yourself, with all of the realism (and maybe even some pessimism) you can muster, what you’re willing to lose as you chart your risk tolerance course.


How do I develop a risk tolerance scenario?

Developing a risk tolerance benchmark for a DIY portfolio can be tricky. Fortunately, there are some fairly good free resources available which can help you do just that. (Alternately, if you’d like personal assistance with creating a risk tolerance profile, we’ll be happy to provide a free consultation at your convenience.) The following tools and services are good places to start putting together your DIY risk strategy.


Risk tolerance surveys

Nearly all of the major financial services companies and opinion websites feature risk tolerance surveys. Some of them are fairly bare-bones, while others are interactive and sophisticated. Most consist of a small number of scale-based questions, and produce results that both categorize your risk tolerance and produce suggested asset allocation charts. We generally recommend the more “neutral” surveys offered by organizations like Morningstar and FINRA (the Financial Industry Regulatory Agency), rather than those connected to the big investment firms.


Researching worst-case scenarios

Analyzing the historical worst-case returns for certain types of assets and securities can give you an eye-opening look at exactly how much upheaval you’ll be comfortable with in the event that your investments take a hard or sustained hit. This data is available from numerous sources, including FINRA, the Securities and Exchange Commission, and the Congressional Budget Office.


Understanding asset allocation

We strongly encourage DIY investors to develop a healthy understanding of the concept of asset allocation, particularly as it relates to multi-asset allocation. (Atlantic Capital Management utilizes a proprietary fundamental and technical strategy to define multi-asset-allocation strategies for our clients.) Most of the recommendations you will get from risk tolerance surveys and other types of research focus very heavily on asset allocation because this is a time tested risk management tool. It imposes discipline to the investor and by the virtue of rebalancing, it provides a buy low sell high benefit. Again, we think you’re better off utilizing the more general research found in this area, rather than that espoused by the big financial players, who often have the performance of their product lines, rather than your individual needs, at heart.


All investments carry risks; developing a risk tolerance strategy for a DIY portfolio doesn’t have to. We wish you success in defining this important aspect of your investment scenario, and encourage you to contact us at Atlantic Capital Management if we can be of assistance.


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