On any given day about half of the investment articles tells us now is a great time to buy stock, and the other half, like the above headline, tells us the stock market world is coming to an end. Whom are you to believe? This highlights one of the primary reasons individual investors, and many investment advisors, lose money in their investments and their clients’ investments. They are either emotional investors and make the wrong moves at the wrong time, or they don’t know what to do, so they create a portfolio then do nothing. The portfolio is not actually managed.

One definition of “manage” is, “To exert control over, regulate, or limit toward a desired end.” Another definition is “to exercise control over, often in a tactful manner.” The implication is that investment management requires action. Is your investment “manager” proactive or passive? If his or her recommendation is the traditional buy-and-hold strategy, they are passive and you must ask yourself if there is any real managing taking place. Sure, they probably spent some time at the front end to determine which of their asset allocation models they would use for you, or they shipped your cash off to third-party money managers who manage millions of individuals’ accounts so everyone gets the same treatment because individualization is impossible. After that, the extent of their “management” is only a periodic rebalancing exercise, and in today’s world that can be automated. If they are not really managing your portfolio, what are they doing to earn their “management” fee?

Regarding that strategy, I ask you to simply recall the years 2000 and 2008 when the market declined about 40% and 50% respectively. A buy-and-hold strategy assures your portfolio will experience those types of declines whenever the market goes over the cliff again. The bigger problem is that a 50% loss requires a 100% increase just to get back to breakeven. Of course, the market does not increase 100% in a short time. Assuming an average annual 6% return for a blended portfolio means the $1,000 you invested and declined to $500, will take 12 years to get back to $1,000; and there is the possibility another 30% to 50% decline could happen in that 12 year period and you get to start over again, but can you afford another 12 years?

Let me single out three words from the above definitions to describe how we feel investment management should be conducted. Regulate is defined as “To control or direct according to rule, principle, or law.” Investment management should be based on tested principles and rules, not emotions or the latest headlines. Limit means, “Something that restricts or restrains.” There needs to be a governor or braking system that limits the possible loss a portfolio can withstand. Finally, I am stretching a little by changing the word “tactful” to “tactical,” which one definition is, “Characterized by adroitness, ingenuity, or skill.” So putting it all together, the right investment management strategy should incorporate ingenuity and skill to limit the downside of the portfolio utilizing a set of rules and principles rather than guessing where the market is going, or subbing it out to third-party managers who also do not know where the market is going because no one can know, and will ride it all the way down. In investing, the only thing that can truly be managed is the risk, and we believe the best investment philosophy is, to make money you must not lose money. I bet you concur.

If you would like to find out more about investing, business planning, business and family progression planning, inter-generational wealth transfer, legacy creation, family coaching, family office services, and all the ways you and your children can give, and how effective philanthropy can positively impact your family, you can email me at kkolson@familywealthleadership.comm or visit our website at www.familywealthleadership.comm. Telephone: 949-468-2000

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