August 05, 2017 in Five, Five, Five | by Scott Wood

Risk Adjusted Performance, Bitcoin, Asset-based Insurance, Vanguard

Can you guess the number of S&P 500 companies that Vanguard owns at least a 5% stake in? This month on the Five, Five, Five we’re discussing the passive investing boom, risk-adjusted performance, Bitcoin, and asset-based long term care insurance.

1. Risk Adjusted Performance

Our goal in managing client portfolios is to generate attractive risk-adjusted performance, emphasis on the risk-adjusted. The better we can protect client portfolios from large drawdowns, the greater the likelihood of compounding capital at higher rates overtime. Unfortunately, downside protection often comes at the cost of giving up some upside returns. However, if a portfolio participates in 70% of the upside of equity markets, but asymmetrically participates in only 60% of the downside, the portfolio will outperform long-term. This philosophy requires a disciplined risk management process, especially during the current market environment of low volatility and high valuations. However, we believe portfolios with asymmetric upside/downside returns can benefit long-term investors for several reasons:

  • The power of compounding; earning more by losing less. (A 50% decline followed by a 50% gain does not equate; a 50% decline requires a gain of 100%, or doubling, to return to even.)
  • The ability to be opportunistic and enhance returns if there is a market correction. This is only possible if there is cash or dry powder in the portfolio.
  • The likelihood of remaining invested and being opportunistic through big drawdowns is emotionally much easier.

 2. Bitcoin and Crypto-currencies

Crypto-currencies have grown increasingly popular over the past few years as investors recognize the attractiveness of the idea – an anonymous and digital currency with a finite supply. New units have to be earned by solving a complicated computer problem, and the more the currency is “circulated”, the more difficult the problem becomes (law of diminishing returns). It was modeled to reflect the difficulty of mining gold. We see several current issues:

  • Although there's a finite supply, the supply of alternative crypto-currencies is growing exponentially. It is too early to tell if Bitcoin will ultimately be the market’s choice as the winner-take-all, leading crypto-currency.
  • In order to be successful long-term, digital currencies will need to gain more widespread acceptance as a store of value and means of exchange. Again, it is too early to tell if it can evolve past the current use of speculation and momentum trading.
  • While being decentralized is part of the appeal of digital currencies, it can come with unknown consequences. Just this week a group of anonymous developers launched a competing version of Bitcoin, Bitcoin Cash, which will compete for investors, developers, and miners.

For these reasons, we prefer to allocate to gold as an alternative currency that can hedge against inflation.

Bitcoin Market Cap

3. Asset-based long term care insurance

Imagine a special bank CD account where your deposit has a money back guarantee, your beneficiaries will receive at least as much as your deposit if you pass away (tax free), and you will have about three to four times your deposit available to spend on the cost of care if you get sick and need help (also all tax free). That in a nutshell is asset-based insurance. However, the account described is held at an insurance company and is backed by its claims paying ability. This may be an appropriate place to allocate a portion of your emergency funds, savings, money market or low yielding assets while planning for long term care expenses. Talk to your Wealth Manager to learn more.

4. Passive Investing Boom

Twelve years ago Vanguard owned a 5% position in only three companies in the S&P 500. Currently, that number is 468. We believe the increased flows into passive investment strategies are correlated to the accommodative policies of global central banks. As we mentioned in last month’s Five, Five, Five, central bank asset purchases have inflated both equity and fixed income market prices. If liquidity is pulled back, passive managers could be impacted similarly on the way down as they were on the way up. While we are open to both active and passive investments, passive strategies are likely poised for future underperformance.

5. Welcome Daryl!

We are excited to announce that Daryl Braley has joined the True North team. In his role as a Client Service Specialist, Daryl assists with report preparation, daily client interaction, new account administration, money movements and supporting the Wealth Management team. Prior to joining True North, Daryl worked as a Senior Registered Sales Associate at Raymond James. Daryl has over 18 years of industry experience assisting ultra high net worth investors with new account on-boarding, stock option plans, 10b5-1 trading plans, restricted stock transactions, and Rule 144 executions.

Filed Under: Five, Five, Five

True North Advisors Complimentary Assessment