Risk management is something we as humans do every day in so many areas of our lives. We adjust our speed as we drive along roads, not simply to the posted speed but more importantly to the surrounding conditions. We also adjust the amount that we eat or what we eat based on our desire to control weight, fall in line with the encouragements of an M.D., etc. As people we study one thing more than another in order to better understand it and control the risk it may bring to one or more areas of our lives.
It is quite ironic so many financial advisors (as well as other professionals) advocate a buy-and-hold investment approach rather than something that is more of a constant awareness coupled with an ongoing response to the risk(s) coming into and going out of markets. Some advisors and investment managers simply don’t attempt to discover strategies such as the CRA-LLC multi-strategy models layout. We often wonder if those same buy-and-hold advocates truly drive with their automobiles on cruise control every mile they travel? We offer our investment management to our clients and to the clients of other advisors to impact the risks in markets.
As an investment manager, CRA-LLC believes we have a solid understanding of many risk(s). While our understanding is not all-encompassing and all-knowing, we steadily monitor risks of various types and in various ways. We also believe that risk management is where every investment decision begins and ends.
Risk is very real part of investing.
We work with our clients, from large corporations to smaller individuals, in an effort to help them in the pursuit of their investment goals that require generating some degree of significant capital appreciation on a risk-adjusted basis. Accomplishing this goal requires a sound risk management plan for markets of many different types and descriptions.
The US equity bear markets during the the first decade of this new millennium have shown that risk is not some highly-cyclical, trouble-in-motion type of product. The US equity markets went thirteen years (late 1987 – 2000) without a large drop in value. We then had three straight years of down, down and down for markets.
But does that mean that if risk occurred and then all-is-well after that? Well, not quite. Late 2007 showed risk had not fully abated; all was not well and risk had not truly gone to bed for another long thirteen year hibernation. The eighteen months that followed (fall of 2007 – March 2009) were as brutal to equity owners as any had seen in more than seventy years. Even the chairman of the Federal Reserve had failed to keep an effective eye on risk and the Federal Reserve minutes of that era showed as much.
CRA-LLC seeks to not make the same mistakes as so many other do. Should we make mistakes, the important thing about risk management is to have a plan of how it can be addressed BEFORE risk begins to come home and impact us all too negatively. When one hears the sounds of crunching metal in a car accident, that likely is not the time to begin to search for a solid auto insurance company. Plans, ideas and policies must be laid out well ahead of time.
With the 2000 – 2002 tech bubble bursting and with the financial woes of 2007-2009 in the history books, now everyone realizes the equity market can and will decrease in value. The human problem is that we never would think of investing in something with the desire for it go down, but it can indeed go down. Investors sometimes often simply failed to perceive how much it can or has gone down.
Many investors don’t realize or have forgotten that these negative market periods can last for years or even decades. Below is a graph of the Dow Jones Industrial Average going back until the early 1900s’. During this turbulent time, we have experienced three positive market cycles and three negative market cycles.
After the bear market began in January 2000, it took seven years until September, 2006 for the Dow to reach its previous equity high. Many investors still have not regained their losses. They also seem to have lost their memory along the way as well as value in their accounts.
In a remarkable book called Against the Gods: the Amazing Story of Risk, published in 1998, one of the most respected figures on Wall Street, Peter Bernstein, chronicles how the human race developed mathematics, business practices and insurance in order to deal with risk. Bernstein maintains that without the ability to deal with risk and change, business on a modern scale is not really possible.
For CRA-LLC, when it comes to being an effective investment managers, we feel in order to be practical, we have to be tactical.
We realize we are unlike a great many of the investment firms here in the U.S. and we are quite comfortable with that idea. We did not set out to be different but we have simply turned out that way and in our view within our industry again, we have taken the road less travelled.
We believe it is just as important that you get to know a great deal about Capital Research Advisors as it is for us to know you and the details of your financial needs and wants. We believe it is important that you know who will be working on your behalf to help you achieve your financial goals.
It seems that so many firms in our industry look alike and act alike. They have different names and different faces but so often it seems that the results are commonly so very similar. If markets rise, that rising market or that “incoming rising of the tide” of markets, can make the results at a firm styled according to this rise at about the same rate as what the markets do. When markets fall, well, it would also seem that a firm built this way is in a rush to fall in marched step – just as the markets fall. Does average really help you as a client? Do you want a firm that tries to simply mimic everyone else, but really just mimics better than their “competition”?
At Capital Research Advisors, we believe our focus should be on what your needs demand of your investments, largely irrespective of the broad market activities. If the broad markets are down 20 percent and we are only down 15 percent, we may have “beaten the markets”, but it would also seem that the markets have now “beaten” you. We also believe that in choosing an investment manager you should be somewhat selfish. You should choose someone who fits your wants and needs well. You should not be expected to fit into what they do or offer. They should migrate to your needs and desires as much as they are able. This may require following the road less travelled.