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This is the second in a two-part series. Read Part One.

In our ongoing conversations with financial advisors, we often hear similar questions about our investment philosophy, how we build portfolios and current market conditions. In this blog post, I answer some of the most commonly-asked questions.

How can Loring Ward’s approach be used to generate retirement income?

We take a different view from much of the traditional investment industry towards generation of retirement income. The traditional approach is to restructure the overall portfolio to eke out the highest yield from all of the holdings – resulting in a portfolio that is heavy in bonds with sometimes large amounts of credit risk and interest rate risk with a smaller amount of stock exposure in mostly high-dividend stocks. That’s one way to do it.

But we think it misses the opportunity to allow the portfolio to grow and thereby misses the opportunity to allow the client to have a higher level of income. We are believers in the concept of “Total Return Investing,” which allows for the generation of an often-higher-level of cash flow in retirement while allowing assets to grow, although with a corresponding level of increased risk.  We believe that clients don’t have to switch over to a singular focus on yield, but can instead continue to use stocks while seeking to dampen risk through holding bonds, and allowing retirement income to be generated by a mixture of coupons, dividends and capital gains.

We are now eight years into a bull market, and many markets have been hitting all-time highs — how does Loring Ward factor this in to their investment approach? What should advisors be doing now to get their clients ready for a correction?  And how would you respond, when a downturn comes, to questions regarding performance of Small and Value?

We are strong believers in Efficient Markets. This Nobel-Prize-winning theory is powerful yet simple: Where the market is doesn’t mean anything to us. It does not deny that there will be market corrections, or, that markets will hit new all-time-highs, or, that rising interest rates will have an impact on corporate profits. But, what it does say is that these events are unpredictable and become reflected in prices so quickly, that as soon as you know they are happening, any opportunity to exploit them has passed.

There is research that we did last year, showing that even when markets hit new all-time-highs, it makes no difference in where the market goes next, up or down. So, we believe that it is pointless to try to re-position portfolios by predicting the unpredictable, or by trying to be the first one to buy (or sell) because we or anyone thinks some important event is or may be occurring.

What does work, we believe, is the patient long-term pursuit of consistent factors identified and backed by academic research and real life historical evidence, combined with the portfolio risk management techniques of asset allocation that we at Loring Ward bring to the table.

In periods of all-time-highs, clients often have fewer questions, so we recommend filling that downtime with productive conversations around re-evaluation of their risk profiles and re-examination of their long-term goals. These are also great times to gently remind clients that risks are ever present, and that volatility and corrections are inevitable and rather healthy in this long journey of investing.

What advances in investment analysis are being looked at to either enhance returns or decrease volatility? What is the latest research you are working on?

Investment researchers believe that stocks may have upwards of dozens, maybe even hundreds of what are known as “factors,” characteristics like we said above such as their market capitalization, their price to value ratio, their industry presence, their regional location, the presence of a dividend and many other characteristics. We believe that Dimensional has identified a small set of these factors which can earn a long-run positive benefit, or “premium,” if the investor has the patience to maintain a portfolio with enough exposure to such factors. We exploit such long-term investments that we think work and we expect to continue to work.

Since we are not active managers, we are not burdened by having to be constantly on the treadmill for ongoing, breakthrough analysis and ideas to try to enhance returns or decrease risk.

Yes, we are constantly looking at new factors, and updating our long-term estimates/inputs, improving the techniques we use to build optimal portfolios, etc. We also are constantly looking for better methods to identify and confirm that the funds we use continue to successfully extract the major market factor premiums.

In terms of current research, we are focusing on the development of a portfolio of tools designed to help advisors easily defend and explain the power of our Asset Class Investing to their clients, and the strategies they develop with their clients to achieve long-term goals.

We believe that better, more frequent, conversations with clients that lead to a better experience will keep clients engaged and excited year after year about their future under your care, and they will refer others to have the same.

 

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