Investing in today’s world seems to be a game for robots as the use of artificial intelligence and Robo Advisors are on the rise. Yet the value these technologies purportedly offers is predominately rooted in systematic rebalancing and broad diversification; concepts that are central to many investment manager’s methodologies. So what “uniqueness” do Robo Advisors actually offer the average investor who is trying to build an investment strategy for the future? In our opinion, none.
At Different Investments™ we believe investing for the future is a process – one that takes skill, will, and time. This is why we incorporate the principles of financial planning and analysis into how we construct investment portfolios. It is our belief that without a clearly defined plan, building a sound investment strategy is akin to throwing darts at the business section of the newspaper. Sure a couple might find their way to a few diamonds in the rough, but it is not a strategy you want to plan your future around.
Our investment philosophy was constructed using three core principles:
- Asset Allocation and Diversification with Non-Correlated Asset Classes
- Active Research leads to Active Return
- Personal Rate Of Return
Asset Allocation and Diversification with Non-Correlated Asset Classes
When Harry Markowitz hypothesized the Modern Portfolio Theory he did so with the belief that asset allocation and diversification were two of the central tenants that explain how a portfolio of traditional asset classes will perform. At Different Investments™, we decided to build on this concept by including different alternative investment strategies with traditional asset classes to help manage portfolio volatility. These alternative strategies can include, but are not limited to, managed futures funds, master limited partnerships funds, real estate investment funds, long short funds, global macro funds, commodity funds, hedged strategy funds, and market neutral income funds. Each of the alternative strategies we use meet the strict requirements laid out under the Investment Company Act of 1940 and are marketed to the public as a liquid alternative investment strategy.
Active Research Leads To Active Return
At the onset of every client engagement, we explain that our investment methodology is rooted in constructing a well-diversified portfolio that seeks to optimize return on a risk-adjusted basis, based on our client’s future goals. Therefore, to build an appropriate investment strategy, we complete a thorough analysis of a client’s current financial situation. This research allows us to calculate the required risk and return level needed to pursue the goals laid out in a client’s financial plan – a plan created by the client or by the client’s financial planner.
Then we select one of our model investment strategies that we feel will align with a client’s financial plan. Depending on each client’s pre-existing investments and type of investment account, we may choose to quickly rebalance into our new portfolio or tactically migrate their pre-existing portfolio into our target portfolio over a twelve month duration. In some cases, we may elect to migrate over twenty-four months if there is a large portion of unrealized taxable capital gains.
Personal Rate of Return
When evaluating the performance of a client’s portfolio, we make it a point to collaborate with the client, or their financial planner, to review a client’s financial plan and corresponding required rate of return. It is our belief that chasing the returns of “the stock market” is futile. For an investor to believe they should gauge their portfolio performance on how an index performs would be similar to gauging one’s progress in the gym to everyone else’s perceived progress. Since each person is different, it stands to reason that their goals, motivations, resources, and biology are also different. This same thought process applies to building an appropriate target return. A target return should be tied to an investor’s personal goals instead of to the performance of a broader group.
Our experts will construct a client’s personal rate of return by evaluating a client’s resources and future goals, understanding how much portfolio volatility their plan can accept, and most importantly, how much time is needed to attain their desired goal. Taking this approach helps our clients understand what their required rate of return needs to be, and how much portfolio risk they need to accept. If their required return is higher than historical averages which in turn requires them to accept more risk than they are comfortable with, then this allows our team to set appropriate expectations with the client as they pursue their goals. Approaching investment management this way ensures both the client and our team understand what the client, or their financial planner, needs to do in order to execute a client’s financial plan AND how Different Investments™ can gauge success across a client’s aggregate portfolio.
Step 1: Discovery Meeting
In order to build a comprehensive investment strategy we have to know how you manage money, your investment strategy, past experience with investment managers, and more. This is why we invest time learning about you in a discovery meeting. During our time together we will provide you with an overall assessment of your portfolio's structure, risk profile, and how we can support you.
Step 2: Engagement
At the end of the discovery meeting we will mutually decide if we are moving forward. Should we move forward our operations team will send you engagement paperwork outlining your investment objective, our services, your fee structure, and more. Once you sign the paperwork we will open investment accounts and submit transfer requests to pull over assets from your current investment firm.
Step 3: Risk Assessment
The secret to investing is risk management, plain an simple. Unfortunately, determining and managing the risk exposure can be challenging based on the types of investments you hold. Between your company plan(s), your personal accounts, and your private investments there is an overwhelming need to integrate and manage the aggregate portfolio risk.
Step 4: Portfolio Analysis
To complete our analysis of your portfolio we seek to obtain a complete picture of your investments, both liquid and illiquid. Then we use our proprietary investment process to research, analyze, and stress test your aggregate portfolio. This allows our team to uncover threats and areas of vulnerability within your portfolio. Finally, we create a set of investment recommendations across all of your investable assets that are designed to integrate with each other.
Step 5: Portfolio Recommendation
At Different Investments™ our team constructs recommendations using your risk assessment and our portfolio analysis. While each recommendation is designed for a specific account all recommendations, across all of your accounts, are designed to work together to create a cohesive investment strategy. For example, if one account strategy is overly aggressive another account may be more conservative to balance your aggregate portfolio risk and match your risk tolerance.
Step 6 (Optional): Alternative Investment
Alternative investments can be an important component to risk management within a portfolio. This can be accomplished through the use of public and private investment strategies. For clients looking to expand beyond mainstream, or traditional, public investments our team works with clients to explore private investment strategies like private equity, private debt, real estate investing, hedge funds, and energy. To learn more check out our Alternative Investments page.
Investment Management Fee
Example: A client engages Different Investments™ to actively manage $3.5 million. When accounts are householded together this client would pay 1.20% on the first $500,000, 1.00% on the next $500,000, 0.80% on the next $1,000,000, and 0.60% on the remaining $1,500,000. The weighted fee would be 0.80% ($6,000 + $5,000 + $8,000 + $9,000 = $28,000 / $3,500,000 = 0.80%). The 0.80% fee is broken down and paid quarterly (0.20% quarterly). The weighted fee will fluctuate with the value of the account balances. As balances increase the weighted percentage decreases.