Investment Planning: The Absolute Return Portfolio™
We developed The Absolute Return Portfolio™ with one goal in mind: positive returns every year no matter what the markets are doing. To those whose only experience is with traditional advice and investments, this goal may seem impossible, but the very wealthy have been achieving this exact result for decades.
Throughout the years, we’ve reviewed hundreds of portfolios as part of our Total Wealth Solution™ process. Most of these portfolios were either designed by traditional advisors like stock brokers or the clients themselves. They have one thing in common; they use traditional investments such as stocks, bonds, and mutual funds in a relative return portfolio.
What does that mean? The best way to explain a relative return portfolio is with an example:
Let’s say a portfolio is using the S&P 500 as a benchmark. If the S&P 500 is down 25 percent in any given year and the portfolio is only down 15 percent, that represents a good relative return.2
We’ve never met anyone who thought losing 15 percent was a good thing, yet that’s exactly the philosophy that traditional advisors and mutual fund managers live by. It’s no wonder that many investors get frustrated in down markets and look for better alternatives, because their current advisors haven't protected them from market downturns. The Absolute Return Portfolio™ seeks insulation from the worst that the market has to offer.
The keys to The Absolute Return Portfolio™ are the Investment Policy Statement (IPS) and the use of nontraditional and low-correlation investments. Institutional investors routinely use IPSs, yet since 1990, we have never met an individual investor who had one. Simply put, an IPS is a statement of exactly what the client expects from their portfolio, including what he or she is willing to invest in, what his or her expected return is, and how much risk he or she is willing to accept. The result is a detailed investment game plan that helps clients set realistic goals and makes the advisor accountable for reaching those goals.
Low-correlation and nontraditional investments can help mitigate some portfolio risk because they behave independently of the markets. By introducing these types of investments into The Absolute Return Portfolio™, we are able to lower overall risk which helps our clients’ weather market fluctuations and reduce emotional investment decisions when negative events occur.
Although it is not possible to guarantee against any loss under all circumstances, The Absolute Return Portfolio™ helps lessen the fear in the investment process by building a strong plan of action for our client's investment portfolio.
2 S&P 500 Index is an unmanaged group of securities considered to be representative of the stock market in general. You cannot directly invest in the index.