Case Study on Revamping Your Investment Management Process

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“When the facts change, I change my mind. What do you do, sir?” — John Maynard Keynes

Since 1995, we’ve had three major bull markets, two major bear markets and experienced the near-collapse of the world financial system in 2008. Not surprisingly, many advisors are scratching their heads and wondering if there’s a better way to manage money than the traditional long-term buy and hold strategic asset allocation.

Given this volatility in the financial markets, many advisors changed their investment approach over the past few years. Specifically, we’ve seen some advisors shift from traditional long-term asset allocation to a more proactive risk management strategy.

Yes, we know all the pros and cons of active versus passive strategies and the fact that every bear market prompts some advisors to dabble in the active camp. With that understood, we wanted to share some comments from Eric Dunavant, an advisor who recently made the shift to a more proactive strategy.

Within the last 2 years we completely revamped our investment process. The downturn of 2000 came very early in my career and when the markets recovered through 2007, I felt confident that buy and hold was a legitimate strategy for my clients. After the downturn of 2008, I vowed that I would do everything in my power to limit the amount of volatility my clients would experience if we continued to have these steep draw-downs in the markets.

This strategy is easy for us to communicate and resonates with our clients. Our clients understand our strategy so well that they are sharing it with their friends and neighbors. This has led to a strong increase in the number of referrals and new clients.

We went to some of the top advisors in the country to discover how they weathered the storm. We discovered that by implementing a disciplined process outside of our emotional feelings we could have greater success with our clients.

We implemented what we refer to as a Protect and Participate strategy for our client portfolios. This process does three things for us:

1. Helps identify good entry points for purchasing stocks.

2. Has an embedded sell discipline to protect our client assets in a down market.

3. Moves us away from higher fee mutual funds to a simple equity strategy. The movement away from funds has allowed us to reduce the expenses to the client because of using individual stocks versus the layered costs of a mutual fund portfolio.

Those famous words, “This time is different,” have come back to haunt many advisors over the years. We’ve seen it before…just when you think this time really is different, the environment reverts to its usual pattern and those who “changed” get burned. Could that be true now and come back to haunt advisors who made the switch to a more active strategy in the past couple years? Only time will tell.

We see two takeaways here.

  • You need to discern the difference between a short-term change in the environment and a long-term one. Eric and many other advisors are betting that we are now in a “rowing” environment instead of a “sailing” one and that a proactive risk management strategy is the right one for the foreseeable future.
  • You need to have a defined investment process that stresses “process” over emotion. It doesn’t matter whether you are an active or passive investor, you still need a process that guides your investing strategy, that you can stick to even during times of stress. It needs to be concise and easy to explain to your clients and prospects.

For example, our colleague Ron Carson of Carson Wealth Management Group has developed a 4-Step Investment Management Process that he uses to explain to prospects how he manages money. To listen to an audio recording of Ron explaining his four steps, please visit www.peakadvisoralliance.com/free-tools and enter the code “4stepprocess” in the code box.

In the audio, Ron describes the following:

  1. How he picks asset classes.
  2. How he evaluates and monitors specific investments.
  3. How he optimizes the buy/sell decision-making process.
  4. How he uses (legal) insider trading activity to enhance market entry and exit points.

Given the volatile markets over the past decade, investors are very focused on working with advisors who can 1) discern the difference between a short-term change in the environment and a long-term one, and 2) who have the discipline to follow a defined investment process.

Are you one of these advisors? Can you describe your investment process in five steps or less? Money is flowing to advisors who can.

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