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 from losses. 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 technology and research, which are vital when it comes to our buy and sell discipline. Technical analysis is the foundation of our philosophy. When an investment rises in value, it means there are more people who want to buy it than those who want to sell. If an investment goes down in value, it’s because there are more people who want to sell the investment than those who want to buy it. It’s that simple – supply and demand.

We will rarely ever buy at the bottom and sell at the top. This is what most refer to as “market timing,” which no one can do. Rather, we aim to buy on the way up the hill, when markets are advancing. Furthermore, we will start selling after the peak has already occurred, pursuing a defensive stance as a market crash begins.

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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.

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 in advisory and administrative fees. Of course, this doesn’t include any IRA fees, trading costs, or other administrative fees.

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 was trained the same way! The problem is, history does not necessarily repeat itself.

If you haven’t learned the hard way yet, you will eventually. Because when the market crashes, these same advisors are trained to show you mountain charts, refer to different periods in time, and then regurgitate the same old one-liners, such as “don’t worry, it’ll come back. You haven’t lost anything unless you sell it. Just stay the course and you’ll be just fine.” 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 outperform “Buy & Hope” portfolios over the course of a full market cycle. But again, we’re aiming to buy on the way up the hill, when markets are advancing. Furthermore, we start selling after the peaks have passed, attempting to miss as much of the downside as possible. Think “maximum up-capture; minimum down-capture.” Sometimes, I like to say “I manage risk more than I manage investments.”

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.   There’s no point in holding onto a failed investment and waiting around so that we can recoup our losses. “Hope” is not an investment strategy, and “not making a decision,” is a decision.

“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 that black jack table. Investors get so emotionally attached to losses, then they want to use those same investments that caused the losses to produce quick gains. As soon as the investment “makes back their money” (if it ever does), the plan is to sell it as soon as it gets there. What?! So this hypothetical investment finally found its legs and now you want to sell it? All because you have your losses back and you’re back to even?! Oh, man.   :-/

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, we are not market timers. There is no such thing. No one can predict what the market is going to do tomorrow or next week. We do not “jump in” or “jump out” of the markets on a whim. Rather, we implement a metaphorical dimmer switch on our clients’ portfolios in order to avoid risky investments when market conditions are hazardous. We don’t need to catch all the up markets and all the down markets – we just need to avoid “the big ones” (like 1972-74, 2000-02, and 2007-09).

We have eight 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. Alerts are added to each investment in our models so I receive email and text alerts if I’m away from my desk. I also have a mobile trading app that allows me to make portfolio changes from anywhere in the world via web or by making a simple phone call to one of our many block traders.

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. There is entirely too much noise and bad advice floating around out there, and 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.