How We Do Investing and Portfolio Management Differently

By John H. Robinson, Owner/Founder

Our portfolio management philosophy has been honed over more than 35 years and shaped by a commitment to critical thinking. Just because the investment industry has always managed money a certain way does not mean it is the optimal way. “Question everything” has been our guiding mantra since Day 1.

Rather than accepting common industry practices as rote, we strive to make our portfolio recommendations evidence-based. That means they should have empirical support and/or backing from credible domain authorities.

The 15 pillars of our investment management philosophy described below illustrate how intentionally and thoughtfully we have broken away from the investment advisory herd.

1. Occam’s Razor

Unnecessary complexity, both in the number of accounts and the number of investments, is often low-hanging fruit in our investment recommendations. Simply put, most people do not need multiple accounts scattered across different banks and investment firms, nor do they need dozens of securities to be properly diversified.

Portfolio complexity, sometimes called “diworsification,” can make portfolios harder to manage without necessarily improving results. Account and investment consolidation and simplification are therefore common recommendations.

2. Expense Minimization

Academic research has consistently shown that investment expenses are a significant drag on investment performance. Wherever possible, we seek to minimize portfolio management fees and expenses. That applies to our own advisory fees, too.

Our pricing generally follows the Costco model: provide great value at prices that tend to be considerably lower than those of our industry peers. Some industry thought leaders have criticized our pricing because they believe we leave too much revenue on the table. Our position is that our clients are paying us to leave as much money on their table as possible.

3. Maximize Portfolio Flexibility

Most consumers have limited resources to allocate among multiple financial objectives. Wherever possible, we favor account types and portfolio strategies that may simultaneously address more than one objective.

Roth IRAs, 529 plans, and Trump Accounts are examples of vehicles that may provide flexibility beyond a single financial goal. Flexibility has value, particularly when future circumstances are uncertain.

4. Optimize Cash Management

For the portion of a portfolio that needs to remain liquid and risk-free, we often coordinate and link client bank accounts with investment accounts to help ensure their cash is working as efficiently as possible from both an interest-rate and tax perspective.

Many of our clients are small-business owners, which makes corporate cash management another area where relatively simple changes may provide meaningful ongoing value.

5. A Curated Strategy for Individual Bonds and CDs

In the consumer market, the bond and cash portions of a portfolio are generally regarded as the “safe” portion. For this reason, we use individual fixed-income securities such as certificates of deposit, U.S. Treasuries, and government agency securities.

We do not use bond mutual funds or ETFs for this purpose because they can be volatile in rising-rate environments and do not provide the same assurance of return of principal that individual securities provide when held to maturity.

In low-interest-rate environments, we generally keep maturities short. As rates rise, we may extend maturities as far as five to seven years. Our objective is to capture approximately 75% to 80% of longer-term bond yields while limiting principal risk from rising rates.

The yield to maturity of each fixed-income investment is known at the time of purchase. In our view, the “safe” portion of a portfolio should be as close to risk-free as practical.

6. Index Funds and ETFs for Growth

For the stock portion of a portfolio, there is overwhelming research support for using ultra-low-cost, capitalization-weighted index funds and ETFs.

In taxable accounts, we typically use one to five index ETFs for simplicity and tax efficiency. In retirement accounts, we generally prefer open-end index mutual funds.

A typical equity allocation might consist of 50% to 60% large-cap U.S. stocks, 20% to 30% U.S. mid-cap and small-cap stocks, and 15% to 20% international stocks.

7. Reimagining Risk Tolerance

We reject the standard industry practice of making investment allocations primarily according to a client’s stated “risk tolerance.”

Investor risk tolerance is often ephemeral. Consumers tend to report higher tolerance for risk when markets are rising and lower tolerance when markets are falling. Risk is also perceived differently from one person to another. One investor may view stock market index funds as risky, while another may regard them as relatively conservative long-term investments.

Our experience is consistent with behavioral finance research showing that consumers generally feel more pain from investment losses than pleasure from equivalent gains. We also recognize that fear of investment losses is often attributable to a lack of education and understanding rather than some fixed, measurable definition of individual risk tolerance.

At FPH, our objective is to educate clients so the recommendations we make are the ones we genuinely believe give them the best opportunity to achieve their planning objectives.

Clients should understand what they own and what could go wrong. We work hard to explain the difference between permanent loss and market volatility. We illustrate what adverse investment environments might look like and explain how we plan for them in advance.

Our goal is to replace fear of the unknown with an educated acceptance that stock market volatility is normal and expected. For investors accumulating assets for long-term goals, we encourage them to view severe down markets not simply as something to endure, but as rare wealth-building opportunities.

8. Growth-Favored Asset Allocation

For investors who are more than 10 years away from needing their money, we reject the standard industry approach of automatically applying risk-based portfolio models with varying allocations to bond funds.

For long-term objectives such as retirement or college savings, we will often recommend a 100% allocation to growth-oriented stock index funds or ETFs. Only as the objective approaches, typically within five to 10 years, do we recommend gradually and opportunistically shifting assets toward risk-free investments. We try to avoid making those shifts when stock markets are depressed.

Importantly, our growth-heavy approach reflects the relative attractiveness of stocks compared with the yields available on risk-free assets. It is not an immutable rule.

If risk-free interest rates were to move substantially higher, the attraction of those yields would naturally reduce the appeal of accepting stock market volatility. Most financial planners working today were not practicing in the 1980s and early 1990s, when CDs and Treasuries sometimes yielded 7% to 10%. Portfolio construction looked very different then.

Simply put, if we could earn 10% on short- and intermediate-term CDs or Treasuries, our equity allocations would likely be considerably more muted. Investors should never assume that today’s principles of portfolio construction will remain optimal forever.

9. No “60/40” Model Portfolios

We reject the popular, but in our view not empirically supportable, notion that there is a universally optimal asset allocation for long-term investment success.

Much of the historical success of the 60/40 stock-bond portfolio coincided with an extraordinary multi-decade decline in interest rates from the early 1980s through the early 2020s. Falling rates provided a powerful tailwind for bond returns and often helped offset stock market volatility.

That experience is not repeatable from current interest rate levels.

If we experience a prolonged period of rising interest rates, we do not believe the 60/40 model will necessarily provide the same protection during stock market declines that investors became accustomed to in previous decades.

2022 provided a textbook example. Intermediate- and long-term bond indexes suffered double-digit declines at the same time stocks fell sharply, producing one of the worst years for the traditional 60/40 portfolio in modern history.

It was also a useful reminder of one of investing’s most important cautions: past performance is not predictive of future results.

10. We Eschew Market Timing

Individual-security risk can be diversified substantially through broad index funds, but market volatility cannot.

While there are fundamental reasons why broad stock market indexes have historically risen over long periods, short-term market movements are extraordinarily difficult to predict consistently. Bear markets are unpredictable in both magnitude and duration.

We therefore believe investors should expect bear markets to occur and plan for them in advance. Doing so can reduce the temptation to make emotional portfolio changes when sharp declines inevitably occur.

11. Dollar-Cost Averaging for Growth

When a new lump sum is to be allocated to growth investments, our preference is often to invest the money gradually over time.

Behavioral finance research teaches that investors generally experience more pain from losses than pleasure from equivalent gains. Investing a large lump sum immediately before a 20% market decline can therefore be emotionally difficult, even when the investor understands the long-term rationale for remaining invested.

To reduce the potential for this type of buyer’s remorse, we routinely use dollar-cost averaging as a behavioral tool. It can help investors not only tolerate near-term market declines but also recognize them as opportunities to accumulate more shares at lower prices.

12. Opportunistic, Not Automatic, Rebalancing

We do not endorse the industry practice of automatically rebalancing portfolios according to a preset calendar or rigid allocation bands.

Research on the value of automatic rebalancing is mixed. We prefer periodic, opportunistic rebalancing when circumstances warrant it.

This approach is also consistent with our emphasis on tax efficiency and portfolio simplicity.

13. No Automated Tax-Loss Harvesting

As with automatic rebalancing, we believe automated tax-loss harvesting can create the appearance of sophisticated portfolio management without necessarily providing the meaningful value consumers may assume.

We regard tax-loss harvesting as a useful tool in appropriate circumstances, not as an objective in itself. Accordingly, we approach it opportunistically rather than automatically.

Although it is not entirely within our control, our strong preference is to avoid having losses to harvest in the first place.

14. No Alternative Investments

Alternative investments may play an important role in institutional portfolio management. In the consumer market, however, we believe their lack of liquidity, complexity, and retail pricing often make them unattractive.

As a general rule, we do not include alternative assets or strategies in client portfolio construction.

15. Say No to Monte Carlo

Much of the financial planning and wealth management industry uses software that applies Monte Carlo analysis to retirement saving and spending projections.

While these simulations may create the appearance of sophisticated analysis, they require users to make numerous assumptions about expected returns, standard deviations, correlations, inflation, and other variables. Small differences between those assumptions and real-world outcomes can produce dramatic differences between projected and actual results over long saving or retirement periods.

Additionally, because advisors may use different assumptions, two advisors using the same software can produce materially different results for the same client.

To address these shortcomings, we created our own retirement savings and retirement spending simulation software, Nest Egg Guru.

Instead of traditional Monte Carlo simulations, Nest Egg Guru uses bootstrapping with replacement. In plain English, the simulations randomly sample more than 50 years of actual monthly return data from major stock market asset classes. For the fixed-income portion, we assume users are investing in CDs or U.S. Treasuries.

We believe this methodology provides consumers with a more tangible way to assess their retirement saving and spending preparedness without requiring assumptions about future stock market returns.

The software also makes it easy for consumers to see how changing variables within their control may affect their results. Our objective is to make retirement planning more understandable, tangible, and realistic.

The Final Word

As with every element of our business model, Financial Planning Hawaii’s approach to portfolio management has been thoughtfully developed. Each of the principles above reflects critical thinking and decades of experience managing other people’s money.

We have no interest in doing financial planning or portfolio management a certain way simply because that is how the rest of the industry does it. Every conventional practice should be open to scrutiny, and every recommendation should have a reason behind it.

We take great pride in being one-of-one.