Investment Philosophy

Defensive Money Management
In a nutshell, for investments we believe that “defense is more important than offense.” Using a sports analogy, we know that championship teams win by being a better defensive team than their opponent. In essence, defense is more important than offense. Yes, you must score some points but you must prevent your opponent from scoring more points on you to win. A similar principle applies to successful investment outcomes. You must “score some points” (profits in the form of gains, interest or dividends) but more importantly, you must protect both your principal and profits from market risk, taxes, inflation, etc.

For example, if you start an investment with $1,000,000 and a severe market decline takes your portfolio down to $500,000, or a 50% decline, it doesn’t take 50% to the upside to break even. You must double the $500,000, or earn 100%, just to get back to $1,000,000. By contrast, if your portfolio experiences a decline of only 10%, then the increase only needs to be 11.1% to get back to the original $1,000,000.

In the early 1980's, Bob was a pioneer in the research of third party defensive money managers. He traveled around the country to find them. These are money managers who have a philosophy that protecting a client’s account against significant downturns in the market is a priority. In essence, they are governed more by risk management than they are trying to “hit the ball out of the park.” To Bob’s knowledge, GCM has access to the best and very likely the largest assortment of such managers in all of Northern California.

We have an approach that is more cautious than many investment advisors. We believe that while market corrections are inevitable, potentially reducing the magnitude of the loss of account value means less of a gain is needed to break even in a market recovery. This means the less you give away the less you need to get back. In other words, potential gains and losses are constrained to acceptable levels.

Why is Defensive Money Management Important?
Defensive Money Management is important to reduce systematic risk. This risk is that portion of total risk that cannot be reduced solely by diversification and negative asset class correlation. Total risk is comprised of two sub-categories of risk. One is called unsystematic risk and the other is called systematic risk.  The key difference between the two is that unsystematic risk is diversifiable and systematic risk is not.

Depending on the decade, unsystematic risk generally ranges between 70% and 90% of total risk while systematic risk ranges between 10% and 30% of total risk. This is important because no matter how much your portfolio is “diversified” by asset classes, sectors and companies, in hopes of achieving negative asset class correlation (when asset A “zigs,” asset B “zags”) to reduce market risk, it still doesn’t address the 10% to 30% of systematic risk that is not diversifiable.

Smart Strategies for 401(k)’s, 457 Plans and 403(b) Plans
For those of you who have 401(k), 457 or 403(b) plans we have third party defensive money managers who can actively manage the mutual funds within your plan to reduce the risk to your account.  Smart strategies for a new reality, guided by the Pension Protection Act of 2006 (PPA) is one of our specialties. Several of these plans now have what is called a “brokerage link” or “brokerage portal” which allows the third party money manager to access not only the mutual funds you see listed but often times hundreds or sometimes thousands of other funds to choose from. The larger number of funds to choose from combined with their active defensive money management strategies puts the odds in your favor of significantly reducing the amount of volatility your money is exposed to.

What about Guarantees?
Some investors want guarantees for some or all of their money. Only the insurance industry can provide guarantees due to their legal reserve requirements. Some investors want principal protection, or no fluctuation of their capital. While others want the assurance that they will never run out of income during their retirement years. To help us assess your preference or non-preference for guarantees please click  here for our “Guaranteed versus Non-Guaranteed Questionnaire for IRAs and other retirement plans.” Click  here for our “Guaranteed versus Non-Guaranteed Questionnaire for non-retirement money such as individual accounts, joint accounts, or trust accounts, etc.”

All contract guarantees and payout rates are subject to the claims-paying ability and financial strength of the issuing insurance company.

Risk-adjusted rate of return:  Investors need to be aware of the impact of their risk choices.  It is important to understand that in nearly all situations for every unit of return there is a corresponding unit of risk. We learned a long time ago that the idea of “higher risk and higher return” generally leads to heartburn.  We do not believe that extraordinary risk necessarily results in extraordinary returns and we will help you understand that.

Chasing Returns:  Sometimes an investor will come to us seeking to beat some pie-in-the-sky notion they were presented about returns that we believe to be unrealistic. We understand that the notion of extremely high returns year after year is usually not sustainable nor realistic.

In general, we believe the philosophy that “if it is too good to be true then it probably is.” However, we are also aware that there are some unique or timely exceptions to that rule. We attempt to be good stewards of your money and believe all investors should try to do the same.  If you are seeking the highest rate of return (with its accompanying high risk) we are most likely not the advisor for you. However, if you believe, as we do, that principal protection is very important while trying to grow the value of your portfolio then we may be the right firm for you.

When appropriate to the individual situation of the client, we believe in diversifying among different styles of active defensive money managers. This provides another layer of manager style diversification that helps reduce risk.

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Diversification does not ensure profit or protect against loss in a declining market. All investing is subject to risk.