By Rick Lear, Lear Investment Management
Next week marks the 50th anniversary of the Woodstock Music Festival. The opening act at that 1969 monumental event was Richie Havens. He was not scheduled as the opener, but he was defaulted into the career-changing spot as he was the only performers present on the grounds. Every other artist was stuck in traffic and not able to reach the venue. Mr. Havens agreed to go on stage (even without his bassist)...and...well...the rest is history.
The promoters encouraged Richie to keep playing after his planned set was complete – still no bands had arrived, but over one hundred thousand music fans were there. After playing every song he knew, the magic happened. The last encore was a song he created on the spot called “Freedom” and became one of the most iconic moments of the festival.
In the spirit of summer vacation, this week we take a vacation from the China, Trump and the Fed. Instead, Freedom. Freedom takes many meanings, but in the spirit of investingatLear,itisparamount. Theabilitytodeliverreturnsforacontrolledamount of risk lies in our freedom to adjust the risk of the portfolio based on market and economic conditions.
This may seem overly logical, but many Investment Managers are mandated to hug a benchmark – meaning their freedom to remove or add risk is limited. In other cases, Financial Advisors do not have freedom (or ability) to adjust the risk of a client’s portfolio. The Advisor is often more focused on financial planning, reacting to news and gathering assets than focused on thoughtful, active portfolio management.
Our research produces a risk budget for the portfolio based on our outlook for the capital markets. We control risk, not just by asset allocation, but by security selection and how the holdings interact with each other. Risk budgets represent the amount of capital we are willing to commit to an asset class, a country, a sector and/or an individual stock.
Assigning a risk budget requires a multi-variate analysis of the upside/downside return profile of a security and how that security impacts the overall risk of the portfolio. In other words, we don’t just look at the risk-adjusted expected return profile of a security on a standalone basis.
We also assess how a security fits in the portfolio. Does it diversify risk or does it concentrate exposure? As a result, assigning risk budgets effectively requires an in- depth understanding of the earnings drivers of each and every security in the portfolio and how they interrelate.
When risk budgets are set correctly, we free ourselves from many of the worries that consume investors.
We are free to:
It was this freedom that enabled us to take advantage of the dip in stocks and the end of last year when the market view was so negative and that guided us to position much more conservatively than market sentiment this summer. Now,we’renotalwaysgoing to be right but our freedom to adjust to new information is at the heart of what makes our strategy unique.
Stay tuned for Part II of Woodstock tribute next Friday.
Rick Lear is the Founder and Chief Investment Officer of Lear Investment Management. Lear is a pure investment firm founded in 2015 with focus on generating returns with measured risk. With over two decades of experience, his ability to identify global investment trends has resulted in superior outcomes for clients.
The Lear Global Vigilance Strategy is rated 5 Stars by Morningstar and ranks in the 5th percentile of managers in the Tactical Allocation category.
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