Volatility Is The New Black

There really are only two reasons people seek out a financial adviser: for help in making money through investing or for help in planning to meet a major financial goal such as retirement or a child’s college education.

Most times, that second reason also is largely about making money through investing. So if investment performance is ultimately the bottom line, why are comprehensive financial plans often touted as the most important element leading one to achieve their investment goals? After experiencing the significant market volatility of the last few years, L&S Advisors’ suggests that while these plans do have their place, having the proper portfolio strategy is far more relevant to successfully achieving one’s investment goals.

Due to several events — including the recession, the slump of 2008, Bernie Madoff, the painful correlation of supposedly uncorrelated assets, thousand-point market declines due to over-stimulated algorithms, uncertainty in Europe and Washington — the primary reason for using a financial adviser may be about to change.

As a result of the decidedly more pessimistic economic conditions, I believe financial advisors need to have strategies that shift to a focus on asset preservation and risk management versus capital appreciation.

After all, why should the stock market turn up? Most companies’ earnings per share have increased not through growth but as a result of operational cuts and stock buy back programs. Housing continues to be a mess. Small companies are still finding it tough to borrow money, and the federal government continues to print money at an unprecedented pace.

Whether they articulate it or not, a nagging fear for many people over 50 is whether they will have enough money to see them through their post-working years. And while many hope and pray that the stock market will work its magic on money they earn in the future, we believe that most investors want to make sure that what they have now is safe and isn’t going to shrink further. The focus must be on risk management.

This less expansive mindset presents a huge challenge for financial advisers who only focus on the growth of capital and not the preservation of capital or vice versa. We believe that given the current economic conditions the preservation of capital is far more important than the growth of capital. We believe financial advisors focusing on one without the other are out of sync with the times. Currently we think a focus on preserving wealth, assuring income, and minimizing taxes is far more compelling than reaching for capital appreciation.

It is our opinion that most financial advisors do their clients a disservice by creating strategies that focus solely on capital appreciation. L&S Advisors believes a prudent strategy needs to be flexible enough to pursue capital appreciation when the economic conditions suggest it is appropriate, but, first and foremost, needs to focus on capital preservation and risk management.

The volatility of 2008, 2009, and 2010 provides a perfect example of our thought process. An investor that pursued capital appreciation in 2008 most likely suffered from the steep stock market declines. On the flipside, if an investor was hesitant after the 2008 debacle and altered their portfolio strategy to preserve capital in 2009, they may have missed an enormous opportunity as the stock market rallied. Thus far in 2010, the volatility we experienced during the last two years has remained and the stock market continues to have large swings both positive and negative. During this volatile 3 year period in the market our risk management philosophy and flexible portfolio strategy has been put to the test, and our results prove our point. A sample representative Growth & Income portfolio has outperformed the S&P 500 during this period with less than half the risk/volatility of the S&P. Informa, a third party money manager database used by the largest financial institutions, has ranked our Growth & Income portfolio #1 over the 2, 3, and 4 year time period compared to over 1000 other managers using the S&P as a comparative index.

The daily volatility of the stock market and overall uncertainty of its direction leads us to believe that investors are best served with a flexible investment strategy. At L&S Advisors, if the current economic conditions suggest it is appropriate to seek capital appreciation, we pursue our best ideas in the sectors we perceive to be driving the growth in the market. If those conditions suggest it is not appropriate and too risky to be invested, we create strategies in attempt to preserve capital.

So whether your goals are to plan for retirement or a child’s college education, we believe the 50 page financial plan that many advisors rely on to help you to reach those goals is worthless if they aren’t capable of managing your portfolio with the proper risk management strategies.

Thus far in 2010, we have learned that in order to navigate through volatile markets in hopes of reaching your goals and achieving a satisfactory level of investment success, your financial advisor needs to be prepared for both strategies every minute the stock market is open.



Past performance is no guarantee of future results. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the securities, markets or issues mentioned. The information contained herein, while not guaranteed as to accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions expressed herein are subject to change without notice.