I mentioned a while ago that I've started managing portfolios for other advisors' client bases. It's not like I'm doing this for a bunch of people but today I was having a sort of onboarding, maybe not the best word, conversation and was asked about process.
The other advisor used to work with someone whose portfolio process was to build a screen that sounded like it tilted to quality and just buy the names that the screen spat out. Generically speaking, something like that can certainly be valid but the way someone specifically implements that approach may or may not be valid.
But with that background to the conversation, he asked if that's what I do and it is not. I thought parts of my answer might be of interest here, so here it goes.
One part is that I spend the vast majority of my time reading, learning, researching, backtesting and looking for ways to break, again maybe not the best word, various portfolio theses and investment strategies. I made a joke that if you read my blog you might think client accounts are jam packed with covered call funds but I barely use them, a couple of accounts where I think a small exposure is beneficial--not YieldMax products.
We spend what I think is a lot of timing pouring over catastrophe bonds here but they make up mid-single digits of an overall portfolio. The time spent is probably a lot for such a small allocation but while I believe these are simple, I realize there is some complexity involved and while I want some complexity I don't want too much complexity.
This other advisor and I have talked about the stock market's ergodicity although I haven't thrown that word at him. I thought of a good analogy from our fire training this past Saturday where we worked with extrication tools.
These are of course primarily for vehicle accidents where the car is so badly damaged that opening a door isn't an option. The tool being used in the picture (not my picture) is called a spreader. We have an older spreader that I'm sure weighs more than 50 pounds. Older ones can weigh 70 pounds but I don't think ours is that heavy.
At 50 pounds, there's no way the firefighter pictured is holding the weight of the spreader. It is wedged in there, the spreader is doing the work, he is simply guiding it. Guiding it no easy thing but it is easier than if he was carry the full brunt of the weight in that position. Again, the tool is doing the work.
With investing, there needs to be some element of letting the market do the work. If someone buys an index fund and is able to hold on no matter what, they are fully allowing the their tool, the index fund, to do the work. That would of course be very difficult every so often but valid so long as there is never a panic sale.
That is important context. The market will go up by some large percentage over the timeframe relevant to your situation. Too much trading and behavioral reactions will impede getting the right return for your tolerances and financial needs. For example selling into a panic or chasing something that has already gone up a lot. Once you fully understand and accept that by and large the stock market is going to go up with or without you, you can start to build a process let's the bottom line grow while avoiding ever succumbing to emotion.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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