Risk and Return

Who I am

My name is Lance Paddock, CEO and Chief Investment Strategist for Thompson Creek Wealth Advisors.

What is this website, or blog, about?

To provide a chance for me to observe, discuss and comment on the things I find relevant, or maybe even just interesting. I’ll be discussing the economic and financial events that interest me, investment philosophy, interesting and amusing tidbits, foray into some issues that are important in preserving, growing and distributing your assets that are not necessarily investment related, and various issues of local interest. To some extent we’ll have to just see.

I will not be making predictions!

What I will be discussing are the risks and opportunities that should be accounted for in any investment plan. Investing is about probabilities, and any conclusions arrived at by me, or others, should be viewed as information to be considered in your own investment plan with your own advisor. It should not be construed as being sufficient information as to constitute investment advice. In fact, just because I find something relevant or interesting should not be construed as meaning I have a definite opinion as to how I would suggest it impact my own clients portfolios, much less yours.

Asset Allocation Philosophy

There are basically ways to arrive at a coherent approach to asset allocation.

Strategic asset allocation

Strategic asset allocation involves the setting of long range allocations between various assets and strategies which vary little over time. Positive aspects: Easy to implement and encourages a long term orientation. Discipline is easiest to maintain. Most investors are best served by such an approach. While not optimal, we humans are not wired to invest in an optimal manner. Behavioral finance has cataloged many of the psychological constraints and biases which cause investors to underperform. This approach allows an investor, and their advisors, to stick to a plan and profit from the long run return of the capital markets, while reducing risk through diversification.

Tactical asset allocation

Tactical asset allocation seeks to allocate investors capital to those asset classes which have the most attractive risk and reward at any given time. This is an attempt to arrive at an optimal allocation. Of course, only a minority of investors (some would say none) are equipped to do this in a way which consistently adds value. Fear and greed are likely to dominate clear thinking and analysis. It is also difficult to maintain a long term approach, as it easily devolves into a difficult to execute form of market timing.

Synthesis

My approach is to marry the two. An Investment Policy is developed that sets long term target ranges for each asset and sub asset class or strategy. The ranges are fairly wide and allow for me to emphasize or de-emphasize the areas where I feel it is most appropriate. The allocation is driven by themes that I expect to materialize over a period of six months to three years. The goal is to avoid giving in to short term noise in the markets and maintain investment discipline. Shorter term opportunistic changes are typically made by the managers we hire to execute the plan who I feel can add value using approaches which are not in my own circle of competence.

The Goal of my Philosophy

I am a long term tactical asset allocator. Valuation is the first and most important aspect of my approach. It is the primary driver of long term returns. There are two fundamental philosophical approaches to seeking returns.

Relative returns

The majority of investment managers and advisors are seeking relative returns. A benchmark (such as the S&P500) is set, and the goal is to meet or exceed that benchmark. If the benchmark has negative returns (say down 15%) and you are down less (say 12%) then the investment is considered successful.

Absolute returns

The absolute return world does not seek to meet the performance of the typical benchmarks. Rather the attempt is to consistently have positive returns over some specified time frame. For example: 3% above the Citigroup 3 Month T-Bill.

Synthesis

I have an absolute return orientation. I seek to allocate assets between relative return and absolute return strategies depending on my view of the likely returns of a given asset class or strategy and the risk being assumed  to achieve this return. Assets which are overvalued or for other reasons seem to entail excess risk and likely lower returns are de-emphasized in favor of absolute return oriented strategies. Undervalued assets, or those for which other factors give me confidence, are invested to accept market risk. The goal is to both increase returns over time, and lower risk. In general terms I’ll let you know how this kind of approach is faring.

As of June 30th of 2008 I still stand, if with far more people joining me, where I have for the last two years. Most assets are over valued, financial and economic risks are pronounced, and an emphasis on absolute returns is warranted. That has served my clients well over the last two years, and I expect it to continue do so for the next year as well.

Thanks for visiting Risk and Return. Please feel free to contact us with any questions and/or comments. Please note our disclaimer.

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