David B. Armstrong:
Welcome to Off the Wall. Today, we’re going to talk a little bit about the management. I’ve got Aaron and Nate here with me today. And one of the things that we get a lot of questions on when we talk to either existing clients or prospective new clients is either remind me about a particular strategy that they’re using or tell me about a particular strategy that you would use if I become a client. And it just dawned on the three of us that maybe we ought to cut some podcast episodes that are evergreen and we can refer them out to people or they can listen to them at their leisure. And this is the first installment of that. Today we’re going to talk about the flexible asset allocation model and what that is, what it means for you as a client, where we use it, where we don’t use it, and really do some nuts and bolts on this, which we kind of stay away from. Right? We always use the analogy of most passengers on a plane don’t want to know how the engine works, but today we’re going to talk about the engine. So, you know.
Nate Tonsager:
It’s an important topic sometimes.
David B. Armstrong:
Right, and some people are super interested in it. So rather than just tell the story over and over again, welcome to the pod. So here we go. So anyway, Erin, why don’t we just cut to the chase and get right into what flexible asset allocation or as we refer to it, FAA is and how it works?
Erin Hay:
Yep. So I characterize FAA just very briefly. It’s a simple trend following strategy, and it’s designed to give someone exposure to stocks and bonds. That’s it. Pretty plain vanilla. There’s no real estate, there’s no alternatives, there’s no commodities. And kind of on that last bit, I know if there’s anyone listening who’s familiar with trend following, if you’re a purist or something, you might throw up in your mouth a little bit. But this is a really simple take on trend. We’re using exchange traded funds or ETFs, so we’re not using futures contracts or derivatives or even individual stocks and bonds. Here we’re using ETFs and we’re either quote unquote, “long” in certain markets or in cash.
David B. Armstrong:
Meaning we own them. When you say long.
Erin Hay:
Yeah, meaning we own them. So we’re not on the short side of the market. So pure trend strategies in addition to participating in a much wider variety of markets, can also participate on the short side, meaning your profit is as prices go down. So we’re not doing that. We’re either in the market or on the sidelines in cash.
Nate Tonsager:
Right. And I think Erin, that brings up a really good point of the trend following strategy, FAA specifically, right, it’s not just stocks and bonds. I would almost characterize as risk on a risk off. And you know, what we’re trying to do there is create a core strategy for our clients, a core allocation. And what I mean there is, the strategy can be the bulk of your portfolio. Sometimes it might even be your full portfolio, because what it does is it navigates risk. Right? And that’s what we’re doing here is we’re trying to identify the trends in the market and take a different standpoint than just to set it kind of and forget it kind of model, right? You can own a 6040 portfolio, but no matter what the market environment, whether it favors risk or it doesn’t, you’re owning 60% stocks. What we’re trying to do here is identify some of those trends, latch on to them and participate both on the up and then kind of the downside.
David B. Armstrong:
Right. So going back to trend, let’s just get a little bit deeper into what we mean by that, because we use that term all the time here. Right. But could be a little jargony to listeners. Right. So let’s dive in and define trend a little bit more and tell people what we’re talking about when we say trend. Let’s unpack that a little bit.
Erin Hay:
Yeah, trend can mean a lot of different things to a lot of different people. I mean, I’m in town this week from Austin and people like to talk about Austin barbecue. You know, we say, I like barbecue. Oh, that can mean many different things to different people. There’s multiple different ways you can cook barbecue, right? You’ve got your Memphis, you’ve got your St Louis, you’ve got your beer. All right.
David B. Armstrong:
Yeah. And as you like to remind me, grilling is not barbecue.
Erin Hay:
Grilling is not barbecuing, my God.
Nate Tonsager:
Yes, I remember that.
Erin Hay:
Exactly. So when we’re talking about FAA. So I would say FAA is a systematic trend following strategy. So we’re seeking to participate in uptrends in global stocks and bonds, and we’re wanting to avoid pronounced down trends where possible. So there’s two components here. There’s the trend and then there’s the systematic part. Let’s sit on trend first. So specifically, what is trend? I’d say very simply, we’re looking at price and we’re looking at in addition to price, we’re looking at an investments rate of change. You know, is it going up or is it going down in FAA, it’s not the sole model input like it is and a lot of other trend strategies, but it’s definitely a critical part of the DNA. So basically what we’re doing is we’re we’re going to figure out a stock bond in cash asset allocation. We’ll touch on kind of how we get to that later. But what. We’re doing after that, as we’re looking at the rate of change or the momentum of the various stock and bond markets that we’re we’re going to be in, and it’s that price momentum that’s going to dictate what we’re doing in our respective stock and bond buckets. You know, sometimes we actually use the term relative strength. And the way we’ll characterize that to clients is, you know, we’re going to buy what’s going up the fastest. And this isn’t as intuitive, especially if you’re talking about wanting to be in markets that are going up. But sometimes when the situation calls for it will be buying what’s going down the slowest. So just a slightly different take on that, right?
David B. Armstrong:
Because trend is two ways, right? There’s the uptrend trend that simply keeps going up in price. And then there’s the downtrend. And people hear that term all the time. The trend is your friend. That’s kind of only half the equation. It’s when the trend is going up. But yes, we talk about trend going up and trend going down. They’re both trends. They’re just going in opposite directions. And also, you know, the term relative strength is sort of synonymous with that. Right. So it feels like trend following goes counter to how a lot of investors are conditioned. Buy what’s going up the fastest. Is it, you know, not buy low, or sell high? Like, what are we talking about here?
Nate Tonsager:
So to define that kind of strategy, right, is it’s waves, right? The market goes up, it goes down. We all understand that. And in the short term, it’s driven by a lot of emotion some time. And what we want to do is capitalize on that. Buy low, sell high as that Old, old, old saying that everyone likes to abide by. And it can make sense for investors. It can make sense as part of your portfolio to have a strategy that’s looking at the value of the companies. But what we’re focusing on here and what FHA is trying to do is realize that in the short term, the price of a stock is what matters. If your price is going up, there’s a tendency and a factor called momentum in the markets that is more than just a physics concept. But what is going up in the market tends to go up longer than you think and at the same time to what things go down and sometimes go down much longer and deeper than you ever would imagine. And so what we’re doing in the strategy is trying to identify the trends and say, hey, this is the trend around, but we need to see it. That’s the big thing and that’s the big difference, right.
David B. Armstrong:
Versus feel it. Like a lot of people invest in, they’re like, I just don’t feel like this market here’s a common one, right? We all this I don’t feel like this market can keep going any higher. Well, what do you mean? You feel like how do you know? Right. But so when we look at trend and we look at momentum, we’re saying like, it doesn’t care how we feel because there is a probability that a trending up market is going to keep going longer than you feel like it could. And same downside.
Nate Tonsager:
Right. And you can use data to identify those trends. And that’s what it is. And that’s the systematic piece kind of that we mentioned. You know, it’s a process around this. It’s not about how we think the world should be. Do Nate, Dave and Erin think that interest rates are going higher? We all have our own opinions and we always say this, but what we want to do is invest how the world is, and that’s what trend is. It’s that show me, you know, what is the trend currently doing and we’re going to ride it kind of like that wave. We’re going to ride those waves up, hopefully get the speed and participate on those upsides. But when the downside is coming, what we want to do is kind of hopefully pump the brakes a little and limit a little bit on the downside.
David B. Armstrong:
Yeah, And Erin, I know you’ve got some to add here, but just real quick, I mean, it’s the process, right? So in a trend following process, I’m going to ask you this question. I know the answer. I’m going to ask you to answer it. Will the process identify the very top or bottom of a trend? Maybe. Right. But probably you won’t notice that the trend is changed until it’s probably rolled over a little bit on the high side or picked up on the low side. So it’s not it’s not always going to nail the top of the bottom of the market, but it’s going to get you close enough.
Nate Tonsager:
And you’re hitting on one of the key risks of that strategy. And every strategy has a risk, right? Is it’s you’re waiting a little bit to see what the trend says. So you’re never going to be the first investor in any kind of transformative trend. That doesn’t mean you can’t participate in the growth that could happen for who knows how long.
David B. Armstrong:
Right. Right.
Erin Hay:
Yeah. And Nate, going back to the your comment of it’s a show me strategy for wanting to invest according to how the world is, not how we think it should be based off some sort of prediction or our understanding of the markets because humans oftentimes have flawed understanding. You know, the overarching ethos, I’d say, of of any trend following strategy is, you know, we’re not in the business of making predictions and I’m paraphrasing actually a really famous old school trend followers names, Ed Seykota, Ed, shout out if you’re listening, you’re probably not. But he said something once. It basically said, you know, we’re content to submit to the flow of events. And I’m I really like that because it shows that we’re not smarter than the markets were modest enough to admit that we could spend hours on this, but that’s it. In broad strokes, you know, no predictions take things as they are. And then just most importantly, know that A, trends exist and B, they persist. So they exist. Trends are out there. We know they exist and that they persist for a lot longer than people appreciate.
David B. Armstrong:
Okay, so we’ve covered the trend following aspect of the whole thing, but let’s talk about the systematic part of this FAA.
Erin Hay:
Yeah, all we mean on systematic is we have a mechanical set of rules in place and we’re not going to deviate from the rules.
David B. Armstrong:
Go hang on a second. You got to say that again, because it was a really important point.
Erin Hay:
Yeah, we do not deviate from these rules. So another way of talking about this, this is the opposite of what I’ll call discretionary investing, meaning that Dave, you, Nate, myself, we saw something in Forbes over the weekend that gives us a great idea and we think it’d be a good idea for the model this month. That’s not how this works, right? This is a systematic process. Now, this isn’t going to guarantee success, but the reason that we like this is, I say by laying out some pretty clear ground rules, we can alleviate the tendency to make rash decisions. Right? We’re humans, we’re fallible. And all this because, you know, in my mind, the important thing about the mechanical nature of this is the self-discipline, discipline. When things go sideways, this is going to step in and help us jettison things when the market goes sideways. Because from a behavioral finance standpoint, and this is huge and behavioral finance, by the way, this is the disposition effect because selling and realizing a loss that’s really hard for a lot of people to do. And what I mean by the disposition effect actually to find that that means holding on to your losers for a lot longer than you should and selling your winners prematurely. So that’s what we want to avoid to do.
David B. Armstrong:
A real life example of that is people who were invested in Facebook for a really long time and then all sudden it takes a dump 50%, 75% down. Some cases of some of the other FAANG stocks. And you’re holding on to that too long. We clearly a trend. What told you to sell that at some point if you are following a systematic set of rules. And so if a listener has experienced that, well, I’m going to wait for it to come back. You are engaging in that disposition effect. And you know, another great example of people who don’t follow rules are my dogs who are barking in the background while we’re recording. So we do have some people around here that don’t follow the rules. So Leila and Tyson, no treats for you. Okay. So let’s briefly talk about risk and return here, because we talked about the trend following part. We talked about the systematic part. But you know, what people really want to talk about is risk and return. So let’s dive into that a little bit.
Erin Hay:
I think people are mostly going to be interested in the return aspect of this. And sorry to disappoint everyone listening to this. That’s not we’re going to spend our focus on here. Let’s talk about the return standpoint of this. So when I’m speaking. With clients and potential clients about this. This is why I tell them. I say this is not an out performance strategy. This is not a high octane, stock based strategy. All those stocks can be a huge component of this. That’s not what we’re looking to do here. We’re not trying to beat the S&P. And I tell people, I said, hey, listen, if you have the willingness and the ability big asterics there to buy something like the S&P 500 and basically have a huge allocation that close your eyes for 20 years and wake up if you’re at a boat race, flex the last allocation against something like the S&P. I’d say the S&P is going to win nine times out of ten. Probably ten times out of ten. Right. But that’s just not how people operate. So for me and most of our clients, I say the vast majority of our clients, the risk component here is more important. This is what we don’t want to do, guys. We do not want to ride a severe bear market down 30, 40, even 50%, which is not unprecedented, by the way, as we all know, great financial crisis, GFC 08 09.
David B. Armstrong:
Even. 2001 202.
Erin Hay:
Oh yes. And that’s even worse. So back in 08 09, the S&P was down over 50% and that was a protracted drawdown dot com. Not as protracted. But Dave, to your point, the Nasdaq had a maximum drawdown of something like 83%.
David B. Armstrong:
And I just I remember I’ve said this a million times, that was when I started off my career. I mean, that’s a more painful memory to me than the great financial crisis. But yeah.
Erin Hay:
Yeah. And when you start getting into those type of drawdowns, losing money gets what I’ll call non-linear in a hurry. And Nate and I were talking about this yesterday. I’d say there are some people out there that can manage a massive drawdown from a willingness and ability standpoint, kind of going back to our S&P 500 example, if you have the ability and the willingness to invest solely in the S&P, close your eyes for 20 years. Never look at your account, never look at the headlines and wake up like you’re probably going to be okay doing S&P there. But for the vast majority of our clients, that’s not an option and that’s just not how they operate.
David B. Armstrong:
Yeah, because they’re living out of a portfolio. Sometimes they’re taking cash or creating cash and things like that. So.
Nate Tonsager:
Well, and I think kind of that’s the big thing that Aaron was touching on, right, is that he used the word non-linear for those drawdowns. So to use the example, a 5% drawdown in the market, it takes a little bit more than 5% in a recovery to get you back to the same point. But a really obvious example that I use is a 50% drawdown, right? So your funds are cut in half. You need your funds to double to get back to the same point. So what that means is you need 100% return from the bottom to get back to your same point. Avoiding those drawdowns is so impactful from a strategy, and that’s what trend following I think adds a lot of value in. And what makes it so difficult, I should say, is it’s an emotional thing. And that’s why systematic what we talked about is so important is to remove those emotions, because where you’re adding those value is in big drawdown events. You’re also adding value because we talk about trends being two sided on the upside in years like 2021, where the market goes straight up, you want to participate in straight up trends. We want to avoid those big downside. It’s emotional either way. How do you manage that trend following strategies that are systematic and powered by data?
David B. Armstrong:
Right. And you know, the other thing that’s interesting about trend to me too, is that you hear this adage all the time when the market’s selling off, well, if you loved it at 100, you got to really love it at 75, right? Unless it goes to 50. So when you you know, you’re looking at trends and you’re saying, hey, we just want to make sure that we are stemming the losses so that people don’t have to have that we can pretty close to a down 30% mark, right? A down 30% requires a 43% return to get back. So I prefer using the example over the word nonlinear. Right. Because I’ll nod my head and pretend like I know what words mean and sometimes I don’t. So that’s what we’re talking about when we say non-linear. But yeah, I’ll come back to my experience with the dot com era. I mean, that was the very I came into the industry in the fall of 1999 and then I had three good months in 2000 before the wheels came off area. And that was a multi year sell off and you know, very painful and that has really formed a lot of my experience. Those were my formative years and seeing people try to claw back from that, I feel like people rode the dot com era down way more than they rode the great financial crisis down because most people were informed by the dot com era. So the emotional reaction to the great financial crisis was a lot different than it was the dot com era. And then I almost saw like a repeat of the dot com era in this last year with the big FAANG stocks in the in the Facebooks and the Amazons and things like that. And people just blindly saying, you know, this is going to come back because it went up so much before it’s going to come back. So, you know, now may not.
Nate Tonsager:
And who knows when it may come back. Let’s play that game as well. Like you said, the dot com era, the long, protracted down climb. That’s what trend strategists are looking to do and that’s where they succeed.
David B. Armstrong:
Yeah. So let’s let’s talk about what we’re actually invested in here.
Nate Tonsager:
So. FAA, Aaron mentioned uses ETFs so as exchange traded funds to set that kind of monthly investment allocation. And that goes between stocks, bonds and cash. Within the stock sleeve, we use six different ETFs, different sizes of companies, geographies and the same thing in the bond market. You know, looking at different credit ratings, different durations, you know, municipals, governments, corporates. We’re using six ETFs in each of those asset classes, along with one cash ETF to set the monthly allocation. On average in any given month, we’re holding about 8 to 10 ETFs, again, all based on trying to hold what is going up the fastest and avoid what is going down.
David B. Armstrong:
Right. So an example, if FAA says that we’re going to have 100% in equity markets or 20% in equity markets. Will it always be those six ETFs for 20%, 30% or 100%? Doesn’t matter will always be. Or is there some up and down in that?
Nate Tonsager:
So it’ll be a combination within anything. So that’s 100%. It may be all six ETFs, it may only be three of the ETFs.
David B. Armstrong:
So it’s working inside of that bucket of six as well. Exactly. Exactly the same thing for the bonds because there’s only one for cash.
Erin Hay:
Yeah. So within stocks and this is we’re kind of drilling down a little further. So we’ve got four domestic areas of the stock market that we’re looking at. So we’re looking at the US large cap core. There’s that word Corrigan. So that’s the S&P 500. The US large cap growth got us large cap value and then we have U.S. small caps. So these are companies that are smaller and market cap than your your big S&P 500 type names. And then we’re looking at two areas outside the U.S. So these are they’ve got some acronyms associated with them, Ether EAFE, which stands for Europe, Australasia and the Far East. So these are developed markets that are not in the U.S. and then you’ve got em, which is emerging market stocks. So think of the BRIC countries. So Brazil, Russia, India and China and not so much Russia these days, but that’s typically what people think of when they think of emerging markets. And then, you know, in bonds, again, it’s two flavors of U.S. treasuries. You’ve got two flavors of corporate, and we’ve got two flavors of non-U.S.. So there’s your six and six. And then rounding things out, we’ve we’ve got a cash or call proxy. So it’s basically ultra short term treasuries. Think of it like a money market ETF. So again, if things are really going bad and we have to sit out the storm in cash, that’s what we’re doing is we’re sitting in something which at this point in the market cycle with what rates are doing is actually providing some type of a yield. But the that’s what we’re doing. Yeah.
David B. Armstrong:
I mean, cash is not trash right now. I mean, at a 4% yield, you’re talking about a higher yield than the yield on the S&P 500, you know, dividends and everything. So but when we talk about this, we may have some of the six, we may have all the six. We have growth value, small cap for emerging markets. What we’re really doing there, I mean, for the listener to understand is we’re actively managing these passive investments. So there’s no passive investments, ETF or passive investments or buying an index, but we’re actively managed the exposure to those passive investments. And that’s really where we’re putting the work in and following the trend, more so than saying like, Hey, we’re going to buy Home Depot and Lowe’s with that as sort of a lead in, why don’t we talk about how we actually arrive at the asset allocation? Because as we’ve established, you know, we’re not just sitting there as an investment committee every month making these decisions. There are rules, like you mentioned before, and a process. Let’s talk about that a little bit.
Erin Hay:
Yeah, we won’t go into complete depth on this, but this is this is in broad strokes. So we said earlier we need to arrive at a stock bond, potentially some cash. That mix. Well, we do this every single month on a predetermined date. Again, going back to the mechanical, systematic nature of this. And we’re doing this, we assess six data points. Okay. Three of these data points are looking at the macro economic environment. And then I would say more importantly, it’s all of the model say as important, but more importantly in my mind and a bit more intuitive as we’re looking at three capital market data points. So we’re looking at actual price trends in global stock and bond markets. So you got six data points in each one of those is going to give us a binary signal. So two ways to go, risk on a risk off or you can think risk on a stocks risk off is bonds. And I think you can see how we might arrive at a 100% stock allocation. So all six of our data points are flashing. Green says all of the macroeconomic data looks good. All the capital market data looks good. We could be in 100% stocks for that given month. And then contrasting that, I think you can see how we might arrive at 100%. Bond allocation is just the opposite situation. And you know, in a what I call like a doomsday scenario, although maybe that’s too strong of a word, if all of our data points are telling us that, hey, we need to be 100% risk off or in bonds, and oh, here’s another sort of extension of this. Bonds are going down in price, which can it happen a lot last. You’re right. We had a terrible year for bonds. You know, we can be in 100% cash if the data calls for it.
David B. Armstrong:
Right. So you mentioned that there’s six data points. Three are macroeconomic in nature and three are capital market. People are screaming at their podcast player right now. Tell me what they are. So can we quickly just rattle off with the six things are that we look at?
Erin Hay:
Yes, the macroeconomic data points are looking at OECD leading indicators. It’s looking at global PMI’s. It’s also looking at the BDI, which is the Baltic Dry Index. So it’s like a proxy for global shipping and you can derive some sense of how strong the macro economy is, not just in the US across the world. So there’s your three macroeconomic indicators, capital markets. So you’re not looking at economic indicators necessary, you’re looking at trends in stocks and bonds and their prices. So we’ve got three there, got global stock demand, relative strength. So looking at the performance of stocks vis a vis bonds, you’re looking at global high yield spreads, which tends to be a proxy for risk. If spreads are blowing out, meaning they’re going up, that tends to mean that people are taking risk off the table. That means it’s a good time to probably be in bonds outside of high yield, but you kind of want to batten down the hatches. And then lastly, and this is a bit more intuitive and be a bit more familiar for people who are familiar with trend following is we look at the percentage of global stock markets that are above their intermediate term moving averages. So there you go. We’ve got three capital market, three macroeconomic, right.
David B. Armstrong:
OECD, by the way, Organization for Economic Co-operation and Development, it’s basically a bunch of different countries like 46 because that has some quick jargon check there. So another question for you, because we talk about how we do this every month on a predetermined date, right? Why not weekly?
Erin Hay:
Yeah, you can do it on a weekly basis. How we could do it on a daily might be it, but.
David B. Armstrong:
We’ve always seen studies on the difference between the weekly.
Erin Hay:
Yeah, we’re trying to manage the turnover on this to be honest and from experience and then also through, through backtesting when everyone, anyone here is backtesting by the way, you should think huge red flag. Like we’re not trying to necessarily go discover a strategy through backtesting because they call it overfitting over optimizing. You can go find the perfect back of strategy. It’s not what we’re doing here, but we do have some sense of the validity of doing this on a monthly basis tends to be the best time frame for rebalancing the strategy.
David B. Armstrong:
Exactly, because I remember when we first started talking about implementing this in and I asked that question of why not weekly? And I remember seeing the data that just said the Monthly was actually you would think that if you’re doing this weekly rate that these indicators work at the weekly was a better trend. It’s actually the Monthly was a better trend, which is why we chose to do it, which is counterintuitive, which, you know, so I wanted to clarify it.
Nate Tonsager:
But there’s also a saying in investing, sometimes you make more money sitting on your hands than tap dancing on your feet. You know, it’s being strategic, systematic.
David B. Armstrong:
So in this model and I kind of alluded to this before, but we can be 100% allocated stocks, right?
Nate Tonsager:
Well, and I think that’s what kind of makes it a core strategy, right? If the market environment, based on those six indicators we said says risk on all the way, we’re going to be 100% allocated to stocks, your static 60 40 portfolio is still there while we’re trying to take advantage of a risk on environment. On the other side, like Erin mentioned, if we need to be a little dial down the risk, we might be a little bit less in stocks in any given month. It’s rare that it’s 100% one way or the other. We’re more usually in the middle, I would say somewhere probably around 70% in stocks on any given month. But what we’re doing is trying to identify those trends and act upon them. We’re taking an active approach. Dave, I love the way you said that we’re actively managing passive funds.
David B. Armstrong:
Right, and so we’ve spent a lot of time talking about why we really like this strategy. And as you know, as a recap, there is, you know, process rules based. We like that. There’s no perfect strategy, There’s no perfect rule that’s going to nail it 100% of the time. So we know why we like this strategy, but that doesn’t mean that it always works or always doesn’t work. So let’s talk about when it actually does work and importantly, when it doesn’t work, because it’s not 100% foolproof.
Erin Hay:
Yeah, this is going to seem obvious, but it’s worth restating. Trend following strategies work when there’s there’s a trend, right? That’s sort of the. No kidding. Right. This does not work, in sideways or choppy markets because the model more or less can get fooled into buying and selling and sort of the trend falling vernacular for that. So we call it a whipsaw. And it’s even worse if it’s happening in both of the major asset classes where we’re investing. So stocks have a tremendous month and then they have a terrible month and they have another great month and another terrible month. Same thing can happen in the bond markets, and that actually happened last year, much less less so than what happened in stocks. What I mean by that is the march upward in yield and down in price in the bond markets was a bit more pronounced. But nonetheless, we got some whipsaw in both stocks and bonds. And this is just sort of the nature of these strategies. So we told you why we love the strategy and why someone might like it, or we’ve got systematic mechanical rules in place. Why might not like it? You might not like it because we have systematic mechanical rules in place. Remember, Dave, you said it’s worth repeating. We do not deviate from the rules, right? You are not going to extract the benefits of this strategy if you can’t stick with it for long enough for the strategy’s edge to manifest itself. You can’t pick and choose. You can’t cherry pick when you follow your rules. Otherwise, you don’t have a system. So that’s another way of me saying that. Hey, you’ll see a lot of this place like tick tock, right? Like, this is the strategy billionaires don’t want you to know about or misses. You’re investing silver bullets, Rich guys, there are no silver bullets. There’s no best ways to invest. There’s not. You know, we’ve talked about this being a systematic strategy versus a discretionary type of model where you might have an investment committee deciding what you’re doing. Hey, guess what? There are some great discretionary investors out there. It’s just not how we’ve elected to invest because this type of way, systematic rules based processes, this speaks to us as advisors and it’s resonated a lot with our clients and potential clients. This is just the way that we have elected to pursue investing.
David B. Armstrong:
So and I will take some artistic license here, but the best investment strategy said there is not the best investment strategy is to control your behavior and your emotion as an investor. That’s I mean, pick a strategy, pick a process, whatever it is. I think some are better than others. But the best investment strategy is controlling yourself as a human being and as an emotional creature and not making catastrophic mistakes that are really, really hard to dig out of. When things like this are going on, A trend goes back and forth.
Erin Hay:
Yeah, I think that’s very well put. And I would add on to that the quote unquote best investing strategy is one that you know intimately or at least are comfortable. This is going back to the to a Peter Lynch mantra of knowing what you own and why you own it. And if you’re able to do that, you’re able to stick with a strategy. So the best investment strategy is one that you know and you can stick with over time.
David B. Armstrong:
Right. So it’s kind of a wrap up here. I mean, flexible asset allocation phase one of our multiple strategies that we use, we like to refer to them as pistons in the engine. This is one piston. It looks at trends we are allocating globally across equities, bonds and cash. We’re using ETFs. We’re actively managing those passive investments by using a process and a model, if you will, that looks for and identifies a trend either up or down. And that process drives what we are allocating to across those stocks, bonds and cash. And that process is driven by those six indicators that we talked about before. And the whole idea there is six is actually better than ten because you still want to overcomplicate things because you will find something that doesn’t talk to the other and the trends start to get washed out. So we keep it simple with those six indicators that drives that. And what we know is that this model, this one particular piston in our engine works when there’s a trend and it’s harder when there’s not a trend like we’re in right now. So I’ll wrap up by saying that we’re always trying to participate in the upside and have a kill switch for our losses. Never guarantee that we’re going to nail the top of the market or the bottom of the market. But we’ve got the arrow on the bullseye, maybe not in the middle, but we’re close to that. And I’ll just wrap up by saying we have podcast where the three of us sit down and we talk about our predictions and we have fun debating and having some discourse over what we think and making predictions and all of that’s fun. We do. We love to talk about those things, but those predictions, they never inform the process or the rules. So we can talk all day long about whether we’re in a recession or what earnings are going to look like or are we at the top of the market or bear market or 200 day moving average, about all we know about all those things, None of that discourse or debate informs these rules or processes, nor do we change them based on how we are feeling about one thing or another. So fun to talk about. But the end of the day, we’re rules and process based, and that’s really the core of the flexible asset allocation. So. Okay, great. Hey, thanks, guys. I appreciate that. Fun to always talk about our strategies. We will do these for the other strategies, I think, to kind of make one for each one of the strategies that we’re doing and talk about the nuts and bolts to talk about how the engine works for those people who want to get on the airplane and know how the engine works. And so it’s been fun. Thanks, guys. Really appreciate time.
