This won’t take long……..

And you haven’t heard anything like it…………

It should change the dichotomy of investing for 90% of consumers…………..

And your chart almost exactly matched what I had already done……...

This is a 4 stage Process that is Patent Pending

Hope you find it interesting

I make reference to your rebalancing article re: via Bernstein and particularly the article, Investors Do Not Underperform their Investments.  I have a decent background (PhD MBA MSFP LLB BSCE- not presented for ego- just paid my dues- and with teaching this stuff). I do not possess the statistical capability with the mathematics of investing as some of the entities on Adviser Perspectives indicate(?) and as you have addressed. Most of the time the noise seems so great that the end result is…………. makes me wonder if it isn’t a podium to show just how smart they are.  (Example- Adviser Perspectives- What to do When an Investment Strategy Performs Poorly).

In any case, my main efforts over the years have addressed risk as the main issue to investing. And the bulk of that necessity is that 90%+ of the general public who have little need for Butler/Swedroe/Tinker Bell et al examination on investing since they would have little money to get these advisors interested in any case. Certainly if mutual funds and some ETFs were the main- if not all- the investments being considered. Investors MUST BE GIVEN a Numerical Risk of Loss. This may seem obvious but never done.

TThe industry comes up with investor questionnaires that (supposedly) predicts the level of risk that is different from every other piece of software coupled with a dissertation on past history, Monte Carlo, Sharpe Ratio,  Beta et al that confuses almost all investors to the nth degree. Add in the new behavioral techniques elements and you end up with……………… stuff.  

Gimme a break. I do not know- nor does anyone else- what a true risk of loss is via conservative, aggressive, moderate or whatever. All the firms questionnaires/software are different (supposedly better) but provide no real idea the true exposure really is in a bad economy- which is what risk is all about. The Risk of Loss.

Phase 1: So this is the new Risk of Loss the defines the various categories

Not an investor: No more than a 10% loss (basic correction) ever

Conservative: Willing to assume losses up to 20%- 25%  (10% to 15% is a correction- up from 10% in the 1990s)

Moderate: Accepts losses to 45%

Aggressive: Accepts losses to 65%

Speculative: Accepts losses to 100%+ (leverage)  

Losses under the Dotcom were 49%; Losses from the Great Recession, top to bottom, was 57%.

Phase 2: The next step needed is to define the numerical potential loss in a recession for mutual funds and ETFs (must have at least three years history). I found an old formula from a CFA manual which defined certain elements of loss- but it was not real life and was therefore pretty useless. Over the years I reworked  the formula and included my interpretations of ‘time’. I won’t address this further but provide a chart showing how well my numbers held up to the real world.


I obviously knew that an absolute perfect number was impossible but feel comfortable with what I can up with. Getting close with my interpretations is valid for additional computations. The numbers can be run on a single fund or on a percentage of the various funds for the overall portfolio allocation. The range in potential losses allows an advisor/investor to use present value etc. to get a range of necessary returns/amount of needed assets. I submit that in many cases, there will be a necessity for greater returns to cover retirement and that is best addressed by Phase 3.    

Phase 3: Next was a method/graph/table on what to do with the reduction of risk. In that regard, I noted that your graph was similar to the point of reduction was well as the point to get back in. 

The real key involves your graph  


And then mine –

The sale of the equities reflects the S&P 500 and shares would be sold in 3 phases as the market/economy keeps its downward movement. Losses would be slightly higher depending on the specific equity allocation. The entry back in is based directly upon an impartial and non industry governmental press release regarding the economy. The dates are unknown but the entry is fixed- no external emotion, basis, AI, behavioral considerations, etc.

The real key to the Process:

1.     Phase 1: Investors know what (previous) questionnaires never offered- a numerical Risk of Loss for the various categories. No guessing what a software program is trying to say with nebulous and esoteric terms.

2.     Phase 2: A potential- and numerical- Risk of Loss for funds and allocations in a recession. At this point an adviser could simply say to clients, “Is this what you are willing to lose”.  (That question, by itself, will change investor the dichotomy of investing.)

3.      Phase 3: Since Advisors/Investors will limit the Risk of Loss to around 12% to 15% through a Phase out of risk to zero, they then can completely alter the conventional ‘wisdom’ of diversification and use ‘all’ equities for greater potential returns during normal WITHOUT concern about massive/excessive losses. Losses simply stop at about 12% to 15%. This changes standard rebalancing because the Risk of Loss  Process reduces equities (which can be up to 100% of an allocation) to zero if necessary. Is this sacrilege?? 

                            Pundits may rail at perceived ‘Market Timing’. This is not. It is Risk Amelioration.
The essence of investment management entails the management of risk, not the management of returns.

Benjamin Graham

4.     Phase 4:  Entry point is non industry and impartial and determined by a government release regarding the past recession. The release- as it should be- says nothing about the market- just recognizes the movement out of a recessionary climate and an improvement in overall economics.  

There are obviously further comments but this provides a focus almost solely addressing risk. It allows the general public, that is clueless (90%) to know what questions to ask about investing and also would not recognize what the answers they should expect in any case. The Process simplifies investing risk, dramatically reduce Risk of Loss, and generally increases returns with greater equity allocations. The fundamentals should/will work 100% for the next 5 years and 80%/90% probability for the next 5. (Ten years is as far out as I am willing to ‘predict’ anything working further in the future.)  Advisors/investors can still use almost all funds and ETFs (with a history) in any allocation and in any manner they desire (though that still does not dismiss poor selections or idiocy by any means). 

LinkedIn article: https://www.linkedin.com/pulse/revolutionary-method-asset-allocation-increase-risk-errold-moody/