Our portfolios are designed as target outcome investments. The portfolio is intended to provide investors with enhanced control over investment results with a predetermined amount of downside protection, upside participation and income with a specified maturity date. All our investments provide daily liquidity. Our portfolio aims to help investors concerned about market losses maintain market exposure. We provide investors with a buffer against market losses while still participating in the market’s gains.
A major advantage of our portfolios is we are not concerned with daily fluctuations as every investment has a maturity date. When you have a maturity date it does not matter how the investment performs during the term. It only matters on the day the investment matures.
Our portfolios consist of four different types of investments.
Income - This portion employs an option strategy on the S&P 500 that provides as much as 30% downside protection with the goal of providing annual income of 6-8% taxed at the long-term capital gain rate.
Income – This portion is invested in structured notes with a 50% downside barrier with the goal of providing 7-14% annual income.
Income – This portion is invested in short term money market instruments, with the goal of earning 5% interest income and providing daily liquidity.
Growth – This portion is invested in the stock market, S&P 500, with up to 30% downside protection with upside potential of 8-19%.
We tailor the percentage of each investment to each client’s goals & objectives.
I do not attempt to predict the future. I also do not listen to any of the pundits on CNBC who claim to know everything when in reality they know nothing. No one can predict what is going to happen with the stock market or the economy. Even if they could, they could never predict how people would react to that news. When North Korea detonated nuclear bombs, conventional wisdom would have been to sell stocks and buy bonds. Yet stocks rose. This is further proof that even if you can predict the future, you cannot predict how people will react.
That is why I follow what is called; “rules-based investing”. In rules-based investing, you define a clear set of rules that comprises an investment strategy. You stick to that strategy month after month regardless of your own emotions.
Developed through years of evolution, our basic human instincts are necessary for our survival. Keeping with the laws of the jungle, these instincts push us to run when in danger and charge when we see opportunity. The stock market, much like a casino, is built to take advantage of these instincts. Investors, if left to their primitive fear/greed instincts, tend to buy high and sell low.
These instincts harm their investing decisions. They make a naive person wait for a stock to double, triple, or even quadruple until every single person he knows claims to have made huge profits. Then he decides to buy, only to see the stock crash! What happens next to our hypothetical investor is that he looks at a -10% loss and hopes it will rebound. When the loss grows to -20% he starts getting worried. At -27% he thinks of selling, but hey, this may be the bottom, since he wants to sell, right? When his loss hits -40%, he goes into shock and stops looking at the stock. When his loss reaches -60% he gives up and stops checking his account. He feels he has been cheated and exits the markets. It may take years for him to return, if at all. Most likely, he will never recover his losses. Having downside protection for every investment prevents this from happening!
Strong opinions, like the ego, may also hinder an investor. Take the ordinary investor. This is especially true as we get older and feel wiser. A perfectly logical opinion goes like this. It is 2011 and interest rates are almost at zero. The average investor determines interest rates will rise in the future (What else can they do?). So, the investor shorts the Treasuries. Eight years later long-term interest rates have barely moved, and our ordinary investor has once again lost money following his opinion.
Following rules prevent this process by eliminating ego and opinions. However, there are still biases at play, even when following a strategy. How smart is my strategy? How smart am I for picking this strategy? But these are easy to deal with. This is minimized by back testing and past performance. At the end of the day, the question should not be how smart I am, but rather how disciplined am I when the investment strategy dictates a buy and when it triggers a sell.
History shows that if you stay invested in the same strategy, you will probably make money. The challenge is to stick around. The more you get involved emotionally in the market, the quicker you will tire and give up. By following a rules-based strategy, you can spend less time watching the markets, reading news and analyses and spend more time doing things you enjoy. In the process, you will also improve your health. Because in investing, as in life, your most valued asset is time. The more you have the better your chances are.
