Investment Philosophy

As you’ve likely noticed, the world’s tranquility can swiftly transform due to various factors such as war, climate disasters, rising interest rates, or inflation to mention a few potential factors. Enhanced connectivity, facilitated by the seamless exchange of information (and misinformation), as well as global trade and alliances between nations, has intertwined economies more intricately than ever before.

We’ve concluded that the traditional Buy and Hold Strategy isn’t a viable investment approach for our investors or ourselves. The substantial downturns, in bad times, associated with this strategy often exceed what individuals are willing to endure. For instance, during the onset of the Covid-19 pandemic in 2020, the S&P 500 experienced a decline of over -30%. We believe this strategy was more effective in an era when global interdependencies were less pronounced, as asset classes now have more correlation than what they used to have. Back then, as an example, the economies of the United States and China had minimal impact on each other, with no significant production of US goods in China and minimal involvement in US Treasury instruments by China.

Instead, we focus on identifying sectors that demonstrate stronger performance trends, evaluating analyst opinions, and conducting thorough research on bonds versus bond funds. We predominantly utilize Exchange-Traded Funds (ETFs) and occasionally incorporate individual stocks into our investment strategies. We tend to overlook mutual funds due to their tendency to be more costly, and ETFs have pretty much replaced the need for mutual funds. Over time, accessing analyst reports and research has become increasingly straightforward.

We recognize that traditional pension plans are becoming scarce in the United States. We have also witnessed that some pension plans have suffered from structural flaws and have been underfunded, thereby failing to fulfill their commitments to employees or retirees. Just ask some of the airline employees who suddenly had their pensions reduced as their pension funds were underfunded or lost significant value or other reasons that were out of the control of the employees.

Locally, you might also recall the scandals with the City of San Diego’s pension plan. In November 2006, the SEC entered an order sanctioning the City of San Diego for committing securities fraud by failing to disclose to the investing public important information about its pension and retiree health care obligations.

Additionally, pension plans typically offer limited options for beneficiaries, with a potential surviving spouse receiving nothing unless specifically chosen as a contingent beneficiary, which may significantly reduce the pension amount compared to a 100% payout option for the retiree.

The 401k, originally intended to complement pension plans, has now become a primary retirement savings vehicle for many employees, contrary to its initial purpose. However, 401k plans are primarily accumulation-focused, with limited investment options, typically offering more expensive mutual funds compared to ETFs. Consequently, employees may struggle to determine their projected monthly income upon retirement and may not accumulate as much as they could have given other circumstances.

In our opinion, this calls for an increased focus on retirement planning using more predictable allocation vehicles. This should be a done on an individual basis as we have observed the right solution can vary given the parameters of one’s specific situation.

We occasionally incorporate insurance solutions into our strategies, when deemed suitable, that possess attributes akin to a “personal pension plan.” This entails ensuring income is either guaranteed or highly predictable. When we refer to “guaranteed,” we mean it is contingent upon the insurance company’s ongoing financial stability and the fact that certain insurance solutions are legally allowed to use the word guaranteed in specific solutions. Therefore, we exclusively engage with insurance companies boasting favorable credit ratings. Additionally, we utilize bonds, CDs, Treasury bonds, and ETFs, tailoring our approach to each household’s unique requirements.

Amidst the upheaval of 2008, it was Wall Street that faced significant turmoil, while insurance companies with robust credit ratings, specializing in fixed life insurance, fixed annuities, and fixed indexed annuities, remained relatively unscathed. The unforeseen acquisition of Merrill Lynch by Bank of America, the absorption of Bear Stearns by JPMorgan Chase, and the acquisition of Lehman Brothers’ North American operations by Barclays, among other notable instances, underscored the unpredictability of the financial landscape at the time.