Overview

Mastering the investment world can take a lifetime, but the difficulty is not due to what most people think. The problem isn’t about mathematics and intellectual genius, it’s actually about the years it takes to learn how to filter through the unnecessary confusion created by Media nonsense, wishful thinking, deception, brief trends, and emotions.

In the end, the amount of knowledge the individual and professional investor needs to master is actually quite small. Below is a brief glimpse at a few key concepts we employ.

Topics:

  • Portfolio Construction
  • Risk Management
  • Investment Selection
  • Tax Efficient Investing
  • Wall Street and Media Influence
  • Trend Following

 

Portfolio Construction

At Leahy Wealth Management Group we apply the core concepts of strategic allocation within an active quantitative approach.

With a strategic buy and hold asset allocation an investor’s risk tolerance is determined and then a fixed allocation of stocks, bonds and cash is assigned- this model is widely used (or attempted) by many investors.

Our active ETF model portfolios work on the same premise except asset categories are not blindly fixed.

At our firm, for the past 16-years, we’ve used index-based ETF portfolios largely designed to reduce the risk of significant market drawdowns. Trend following, market extremes / volatility, and recession risk are some of the primary factors we employ.

 

Risk Management

In a perfect world buy & hold may be a good way for young investors to invest, but the reality is that we don’t live in a perfect world and most investors with significant assets are not young and can not tolerate the significant drawdown risk of a pure buy and hold approach.

Most all investors are exceptionally vulnerable to the instinctive need to act during unusual times of market turmoil.  What differentiates Leahy Wealth Management from most other investment advisors is that our portfolio approach is designed to act.

Our risk management focus is based on avoiding large drawdowns by employing trend following strategies that have been around for decades and are easily demonstrated and explained – with track records.

In our experience, our investment approach helps clients better achieve long-term success by inherently moderating the investment experience and assisting with the most difficult aspect of investing - market extremes in both positive and negative market cycles.

 

Investment Selection

Investment selection is where most investors make expensive mistakes.

At Leahy Wealth Management Group we recognize the 100′s of studies (over the decades) illustrating the underperformance of investment products. If the poor performance was only 50% of the time that would be compelling, but the underperformance is closer to 90% of time – so it’s not even a close call.

We therefore construct client portfolios with inexpensive index-based ETFs. Ultimately, the investment selection process is based on odds, and indexes have consistently beat the vast majority of managed investment products at a fraction of the cost.

Given this, we encourage our clients to not pay commissions and steep fees and instead save their money by avoiding most all investment products.

 

Tax Efficient Investing

Mutual funds and structured investment products are often difficult to manage for tax efficiency, and likely should never be in one’s taxable accounts.

Index-based ETF’s are exceptionally well suited for tax efficient investing.  One of the most advantageous tax benefits of these vehicles is likely Tax Loss Harvesting.  Implementing tax loss harvesting and tax efficient strategies is an added effort, but as numerous studies over the years have shown, it can be an important step to optimizing bottom line performance.

Tax loss harvesting may be especially beneficial during difficult times of the market cycle, such as the year 2000, 2001, 2002, 2008, and 2009.

For research and articles of interest see: Active Tax Management Adds 2% Annually , Tax Loss Harvesting Tips , Tactical Tax Loss Harvesting  and  Keys to Tax Efficient Investing

 

Market Extremes and Underperformance

The Boston based firm Dalbar conducts an annual study titled, “Quantitative Analysis of Investor Behavior”. Their annual analysis over the past 20-years shows that the average investor has realized a total return that is less than half the total return of the S&P 500. According to Dalbar the underperformance conundrum is primarily do to “investor behavior.”

“The investor’s chief problem – even his worst enemy – is likely to be himself.”

Benjamin Graham

Why does the average investor perform so poorly? The bottom line is that the average investor makes their biggest mistakes in market extremes. In effect, the average investor does most of their portfolio damage in about 5% of their investment time frame by emotionally chasing market tops and panicking during market bottoms.

What the Dalbar study clearly illustrates is that the average investor underperforms because they get caught up in market extremes.

 

Wall Street and Media

Today, front page financial scandals are just as common as always, and they consistently highlight the seemingly endless conflicts Wall Street has with their supposed customer.

Unfortunately, the data shows that the average investor is heavily influenced by Wall Street and the media.  Moreover, the Dalbar study referenced above outlined the problem with investors underperforming, but what’s not discussed is that the media and Wall Street are the primary players in fostering a climate of confusion and bad advice.

Ultimately, the bottom line is that the centers of conventional investment wisdom have proven to be dangerous to investors financial health.

Given this reality, one of the primary objectives at Leahy Wealth Management Group is to provide our clients with consistent common sense insights to help them better cope with the counter productive Guru games and media dramas - especially during times of turmoil.

 

Market Trends

Pull-up a stock market chart going back 100 years and you’ll see the history of clearly defined bull and bear markets..

Long-term bull markets, like 1982 to 2000, are typically marked by good fundamentals and good market performance.  After a market has done well for a number of years people gradually become conditioned to good performance and optimism. That conditioning usually lulls investors into increased risk taking. Both individuals and businesses tend to overextend during this period.

Long-term bear markets are the same as the bull market just in reverse. Long-term bears are marked by poor fundamentals usually caused by the excesses of the previous bull cycle.  Bear markets are often accompanied by financial and political unrest, high debt loads, and a propensity for choppy economic growth and pessimism.

It’s important to note that within long-term trends there are short-term cycles that run contrary to the trend.  For example, during the 1982 to 2000 bull market the DOW went from 777 to 11,722, but there were four bear cycles (corrections) within the bull market that lasted on average 19 months, with losses on average of 27%.  

The mirror opposite occurs during bear markets like the1966 to 1982 period when the DOW went from 748 to 777 (that’s right – 16 years of sideways movement), but there were four bull cycles within the bear market that lasted anywhere from 18 to 44 months, with gains on average of 42%.

In Closing

It’s important to note that there is no such thing as a perfect investment strategy, and past performance is not a guarantee of future performance.

For more insights please look at our 10 Reasons We’re Different.

Contact Us