Adam D. Koos, CFP® President/Portfolio Manager

This past month, with the market getting a little temperamental, we’ve had a handful of prospective clients dipping their toes in the water, asking us questions about our investment philosophy. So this week, I thought I’d try to go through a “how we do what we do” in as simple a manner as possible. Naturally, feel free to write back with any questions, so we can elaborate. When it comes to strategy, it’s very easy to go overboard with jargon, so I don’t want to completely over-do it here.

First off, we believe businesses and families alike cannot afford to experience another big loss, as they did in the crashes of 2000-02 and 2007-09. When it comes to managing money, we focus first on defending your portfolio against crashes. This doesn’t mean we’re overly conservative… we just know that, while both are crucial to making money, avoiding loss is more important than capturing gains.

Any offense, without a defense, is worthless. This is why we call our portfolio management strategy Defense First.®

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We are extremely passionate about what we do for our clients. As such, we’ve made significant investments in time, technology and research, which are vital when it comes to our investment management discipline.

Technical analysis is the foundation of our philosophy.  We use a combination of trend following, quantitative analysis, and relative strength to keep our money working for us when the market is healthy, all while reducing downside risk when the market inevitably crashes.

When an investment rises in value, it does so because there is more buying power than selling pressure. If an investment goes down in value, the inverse is true; there is more selling pressure than buying power.

When managing our clients’ retirement portfolios, we will rarely ever sell at the top of a bull market peak or buy at the bottom of a market crash.  Rather, we aim to buy on the way up the hill, when markets are advancing.  Furthermore, we will start reducing exposure to the market after the peak has already occurred, pursuing a defensive stance as a normal, healthy market correction evolves into a full-blown crash.

While it might seem like common sense, it’s not as easy as it sounds, which is why Financial Advisor Magazine recognized us as one of eight named to their national “Research All-Star Team” for portfolio management.  It’s the same reason Proactive Advisor Magazine put us on the cover, interviewing us about the strategy (we’ve been asked to write several other articles since then, which you can find in our Press & Media section on our website).

We don’t use mutual funds at our firm. Rather, we use Exchange Traded Funds (or ETFs as they’re often called) and individual stocks for our more aggressive models. The aim is to stick to low-cost, or better yet, no-cost investments. Many firms will charge a fee of 1.0% per year, but when analyzed, the mutual funds you own add an additional 1.5% to the annual cost of your portfolio, totaling 2.5% per year (or more) in advisory and administrative fees. Of course, this doesn’t include any IRA fees, trading costs, or other administrative fees, all of which we pay for…not our clients.

When financial professionals begin their career, they’re trained to select the latest, greatest mutual funds, based on star-rankings and a 5 or 10-year track record. Then, they beat your portfolio up, compare it to their cherry-picked “best of the best” alternatives, and tell you to transfer your money, sell your stuff, and buy their stuff. How do I know all this? Because I started my career working for a major, national brokerage firm and this is how they train their new financial advisors. But let me share some truth:  Past performance does not indicate positive future results!

I’ve been through two market crashes, and these big, Wall Street firms trained their advisors to show you big, long mountain charts and then regurgitate one-liners, such as “don’t worry, it’ll come back. You’re buying more shares as your portfolio goes down in value. Just stay the course and you’ll be just fine.  You haven’t lost anything unless you sell it.” The truth is, you haven’t made anything unless you sell it!

We believe maintaining a non-emotional, rules-based, technical approach to money management, we can provide better risk-adjusted returns versus “Buy & Hold” portfolios over the course of a full market cycle.

Naturally, not everything we buy goes up in value. Sometimes when we buy something, the investment sprains its ankle after the first 50 meters and we need to pick up the baton and hand it to another runner. This is why we always know where we want to sell an investment before we even buy it.

“I became independently wealthy by staying at the black jack table until I earned all my money back,” said no one, ever.

Being stubborn, getting “married” to an investment, and “waiting for it to come back” before you sell it is a lot like a black jack table. Investors can get emotionally attached to losses, then they want to use those same investments that caused the losses to produce recovery gains. As soon as the investment “makes back their money,” the plan is to sell it as soon as it gets there… or should I say, if it ever gets there.

We have the ability to offer truly dynamic portfolio management. Markets quickly evolve over time… and in order to optimize your investment success, we have to adapt to those changes. If the research we’re conducting on a day-to-day basis indicates an imminent stock market crash on the horizon, we don’t want to own stocks!

To tell a quick story, being on offense is a lot like putting a top-notch, team of investments on the field so we can capture market growth and make money. On the other hand, playing defense is analogous to avoiding investments who are injured, replacing players on the field that have become exhausted, and under unique circumstances, when (not if) the markets begin to crash, the rain starts to pour, and lighting begins to strike, it is sometimes detrimental to our investments’ lives to move the entire team to the locker room if need be!

To be clear, no one can predict what the market is going to do tomorrow or next week.  There is no such thing as a perfect investment strategy that picks bottoms and sells tops.  As such, we do not “jump in” or “jump out” of the markets on a whim. Rather, we implement a metaphorical dimmer switch in our clients’ portfolios in order to reduce risk when market conditions are hazardous. We don’t believe we need to catch all the upside and avoid all the downside– our goal is to avoid a good portion of “the big ones” (like 1972-74, 2000-02, and 2007-09).

We have four model portfolios and all our clients own one or more of these models. In fact, those who work for our firm own the same exact portfolios our clients do! As a result, we have the ability to look after each and every clients’ portfolio throughout each day, every single day of the week.

Hopefully, this helped to clear up a little more about the specifics of our strategy. We’re living in unprecedented times – and unprecedented times require unprecedented action. As the market changes, you need to adapt – and things have certainly changed. This is why we don’t implement a “set it and forget it” approach to money management. It’s why we don’t leave our clients’ portfolios to chance. When it comes to your life savings, we take a “Defense First” approach because it’s not good enough to make a profit… you have to keep the profit, too.