Wealth Management without Market Predictions
Investors want to know:
- Where’s the market headed?
- Where are interest rates headed?
- What will GDP growth come in at?
- Are we headed toward recession?
- How will a government policy impact the markets?
- Will a hot stock’s amazing run continue?
- Which funds will be in the top quartile this year?
We posed questions like these to Empirical Asset Management’s CIO Glenn Caldicott. His answer: “We don’t know. Neither does anybody else. If you meet a wealth manager that claims to know, run!”
So how does wealth management work without predictions? What do you guys do? Here are the key ingredients:
(1) Client Specific Risk Tolerances
The first step is always assessing risk tolerance for each client. Take the example below:
| Port #1 | Port #2 | Port #3 | Market Benchmark | |
| Year 1 Return | 60% | 5% | 30% | 25% |
| Year 2 Return | -40% | 5% | -15% | -15% |
| Total Return | ? | ? | ? | ? |
Which hypothetical portfolio above had the best overall return?
Turns out its portfolio #3 with 10.50% total return. However, compare that to:
- -4.0% for portfolio #1
- 10.25% for portfolio #2
- 6.25% for the market benchmark
While portfolio #3 had the best total return, it was quite volatile compared to portfolio #2 for only a 0.25% difference in total return. How comfortable would you have been with the portfolio #3 journey compared to portfolio #2? What about if you held portfolio #2 instead? Would you have felt annoyed at the end of year 1 because the market delivered 20% additional return?
(2) Precaution Rather than Prediction
Focus on risk not return. Risks are often more predictable and controllable than returns. Investing rules and awareness of trends informs portfolio precautions. This risk management focused approach is more reliable than striving to consistently make brilliant predictions about future winners and losers.
(3) Investing Discipline with Rules-Based Decision Making
Empirical’s CIO Glenn Caldicott has been managing wealth for 30+ years through four bear markets and four bull markets. Their Rules-Based approach removes subjective, emotional decision making from the investment selection and de-selection process.
(4) Know What You Own
Finally, as basic and obvious as it may seem, knowing what you own by looking under the hood of various funds and ETFs is crucial. There are numerous safe-seeming bond funds that aren’t so safe when you drill down into their holdings. Ditto for thematic ETFs.
These are the main steps to managing wealth without relying on predictions.
Rules-Based Wealth Management
Click here if you’re interested in connecting with Empirical’s Glenn Caldicott to learn more about Rules-Based Investing® or Trefis systematic strategies.
You also may be interested in: