Why Your Investment Return Targets Should Be Priority #3

By Mark Van Mourick
January 2010

I have climbed mountains like the Matterhorn and El Capitan that most people have heard of, and many like the Dru, that most have not. On these long, multi-day adventures, I have always hired a local mountain guide. The old ones are the best. As the saying goes, “there are old guides and bold guides, but no old, bold guides.” The younger ones sometimes have the fastest ascents and have climbed the hardest routes, but I value and am more interested in experience and perspective.

The best guides correctly understand that reaching the summit is goal #3. Goal #1 is keeping their client alive and safe. This involves research on route and weather conditions, capabilities of the client, back-up plans, equipment for the unexpected and a conservative “take no unnecessary risks mentality.” Literally, downside protection. Goal #2 is a pleasant holiday. This may seem trivial, but the longer I live, the more I appreciate the “experience.” The guide/client relationship of communication, trust, pace and appropriate level of risk/difficulty all contribute to the satisfaction of the adventure, whether I summit or not. Finally, yes, goal #3 is the peak of the mountain. However, the real goal is to get to the top and back home safely.

The analogies for investing are pretty clear. While your overall goal may be for financial independence with a particular lifestyle, reaching your return target every year may not be as important. Keeping the majority of your capital intact, regardless of the unexpected, should be goal #1. To continue the climbing metaphor, 2008 would have been a good year to have stayed in the hut (cash) and not even attempted to climb. 20/20 hindsight is perfect, yet the weather looked pretty good in early 2008. You will never reach your investment goals by sitting in a hut, so how do you invest prudently for the long term?

Optivest’s stable returns have not come from being smart enough to hop from one investment category to another or going in and out of cash. Rather, we focus on broad diversification – beyond typical stocks and bonds. To a typical portfolio we add sizeable allocations to commercial real estate, trust deeds and unleveraged hedge funds. Secondly, we concentrate on understanding every investment’s downside risk. We’re certainly not perfect and we too were humbled in 2008. Although this combination did not produce returns to meet any of our clients’ yearly return goals, it did keep the majority of our accounts’ losses to single digits, thus keeping the majority of their investment capital intact.

Like our mountain guide’s goal #2, the customer experience is also very important. The relationship between you and your advisor is critical. The more your investment advisor knows about your past investing, present resources, risk tolerances, and desired communication expectations, the better. Likewise, the better you understand and are comfortable with your investment advisor’s overall approach, research, strategies, reporting and availability – the more satisfied you are going to be throughout the journey.

Finally, annual return targets, with corresponding volatility collars, are important. However, the risks to achieve a 10% return in 2008 are a lot different than they will be in 2010. We find that it is more critical to get the appropriate level of risk right and let the returns come correspondingly, rather than aiming for a particular return, regardless of the current risks to achieve it.

Investment advisory services offered by Optivest, Inc. under SEC Registration and securities offered through Gramercy Securities, Inc., member FINRA & SIPC, 3949 Old Post Road, Charlestown, RI, 02813, 800-333-7450.

Stable return is relative to that of the S&P 500 for same period. The opinions written in this article are for informational purposes only are not intended to be a solicitation, offering or recommendation of any security, investment, management or advisory service. All investments involve potential loss of capital and may not be suitable for all investors. Past performance is not a guarantee of future results. Performance references are to Optivest managed accounts (net performance) in year 2008 and are documented.