Risk and Return

Who I am

My name is Lance Paddock. I am the Director of Investment Strategy for Peters Wealth Advisors, a team of professionals who act in concert for a select group of individual and institutional investors. We are located in Baton Rouge Louisiana, though our clients and associates who help us in this endeavor are located throughout the country.

What is this website, or blog, about?

To provide a chance for me to observe, discuss and comment on the things we find relevant, or maybe even just interesting, when we advise our clients. 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 (or if you are a client, us.) 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 portfolio’s, much less yours.

Asset Allocation Philosophy

There are basically three approaches to 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 under perform. 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

Our approach is to marry the two. We develop for each client an Investment Policy that sets long term target ranges for each asset and sub asset class or strategy. The ranges are fairly wide and allow for us to emphasize or de-emphasize the areas where we feel it is most appropriate. These changes are typically made each year at our yearly investment conference. The allocation is driven by themes that we expect to materialize over a period of six months to three years. Thus we avoid giving in to short term noise in the markets and maintain our investment discipline. Shorter term opportunistic changes are typically made by the managers we hire to execute the plan.

The Goal of our Philosophy

We are long term tactical asset allocators. Valuation is the first and most important aspect of our 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

We have an absolute return orientation. We seek to allocate our clients assets between relative return and absolute return strategies depending on our view of the likely returns of a given asset class, and the risk we are taking to achieve this return, warrant. 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 us confidence, are invested to accept market risk. The goal is to both increase returns over time, and lower risk. In general terms we’ll let you know how we are doing. As of June 30th of 2008 we still stand, if with far more people joining us, where we 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 our clients well over the last two years, and we 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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