Defense Wins Championships

With the advent of the 2019 football season upon us let’s remember the old ball coach’s adage that the best offense is a good defense. The same can be said of investing especially as some believe we are nearing the end of a nearly ten-year bull market and what could be more global economic uncertainty. Much of this is beyond our control but our responsibility as fiduciary investment advisors is to focus on what we can control.

As a fiduciary, we at Unified Trust Company take pride in our goal-based planning approach.  This is the game plan that helps clients achieve their goals by managing the downside risk and staying the course.  

Everyone loves to see the quarterback reach back and toss one down the field, but emotions change quickly if that ball is intercepted.  When you think about it, not every play in a football game is designed to score a touchdown.  In many cases, the play is setup to help move the football down the field to inch closer to the goal line. 

Goal based planning takes the emotion out of it.  The steady calculated approach may not always be the most exciting from a spectator perspective, but the idea is to come out victorious and achieve your financial goals.  Half time adjustments are sometimes necessary if they are consistent with goals-based planning.

That means planning for the volatility and implementing defensive measures to help reduce risk and keep moving down the field towards your goal.  Our trust executive and investment committees and all our teammates have historically delivered competitive investment performance while helping clients achieve their goals under uncertain market conditions.

 

Protecting against downside risk sounds complicated, but it may be as straightforward as monitoring  asset allocation. Generally, the main investment asset classes include equities (stocks or stock mutual funds), fixed income (bonds or bond mutual funds) and cash (money market securities). Recently alternative investments have been added as an asset class. Studies show that a significant amount of total return can be attributed to asset allocation.  This is why it’s important to have your portfolio periodically rebalanced to make sure that your risk tolerance and investments align.  At Unified Trust, we do this for our clients; “following the play book.”

An often-overlooked type of risk management involves income tax exposure. During periods of volatility portfolio turnover of individual securities or mutual funds can generate phantom income from the sale of low basis assets, reinvested capital gains or capital gain distributions (from stock mutual funds). There’s nothing more disconcerting than experiencing volatility or down-market conditions and then be surprised when the IRS Form 1099B reflects significant unexpected realized capital gains after year-end. What’s even worse is to have significant realized capital gains without having the available cash to pay the taxes. Our fiduciary investment advisors are mindful of the tax consequences in the portfolio management process. The matching up of capital gains and losses or making use of capital loss carryovers when available is in our “advisor play book.” This can become even more complicated when clients have more than one investment account or they own closely held pass thru investments that generate capital gains and losses. The idea is to keep you, or your tax advisor informed to help you best manage income tax exposure.

One sometimes overlooked aspect of risk management includes understanding the human side of investing. Investors can get caught up in the emotion of market volatility while investment advisors tend to be more conditioned to market swings, “markets go up and markets go down, but the world is not coming to an end.” That’s why it’s important to meet with your advisor periodically, so that he or she knows when your goals or risk tolerance have changed. 

Part of successful team play involves good communication in the huddle to avoid client anxiety.

Whether it’s the Unified Fiduciary Monitoring Index® or our Trust Investment Committee’s concern about a fund’s volatility, expense ratio or a stock’s price earnings ratio, we are constantly monitoring the holdings in our client portfolios. We take the long-term approach to investing to deliver consistent yards per carry avoiding fumbles and interceptions by taking a systematic approach to risk management as part of the game plan.

Feel free to discuss the defensive strategy for your portfolio with one of our fiduciary investment advisors. We think a good defense makes the best offense to get you over the goal line in times of uncertainty.

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