Investment Opportunities in A Down Market

Investment Opportunities in a Down Market
What to do? What to own? Where to invest?
How well are you managing risk these days?
Over the years, I have analyzed many a client’s 401k statements. A typical 401k
plan allows for many investment options in the name of diversification. Oddly, almost
all of these options will lead to a similar result when markets move in any direction.
That’s not diversification at all.
Many years ago, I realized that I would need to create asset allocations much
differently than what the herd of the marketplace offered. The garden-variety asset
allocation of large-company, medium-sized company and small-company stocks was
not going to cut it. This doesn’t reduce risk.
What the investor needs is an “inverse” asset class that moves up during sharp,
major market declines. This asset class offers superior protection against downside
risk when compared to traditional asset allocation models. Traditional asset classes
are highly correlated offering little downside protection during major market
declines.
Years ago I also realized that creating client portfolios one ‘stock pick’ at a time was
a kin to the surgeon awakening the patient from surgery asking for approval to tie
another suture. This cobbled-together approach was of no interest to me. Rather, my
desire was to create portfolios in a holistic approach thus maximizing the client’s
probability for financial success.
This led me to the direction that I have been practicing for years, using the services
of professional ‘strategists’ (which is what our industry calls investment firms that
create asset allocations).
I have detailed this approach within my practice through a blog posting date July 11,
2008 titled “Dave, How Do You Construct Portfolios?” Therefore I will not spend time
on this matter here. What I was looking for years ago, and thankfully found, was a
portfolio strategist who exhibited forward thinking in portfolio construction. Simply, it
was not good enough to just use past performance for asset allocation design.
A part of the forward thinking is the use of inverse asset classes to manage and
mitigate short-term market declines. Although client assets were down in 2008, the
use of an asset allocation design to include inverse asset classes reduced the size of
decline compared to the broad market. Let me review and focus on the asset
allocation tools inside my ‘virtual’ toolbox that have offered superior risk mitigation in
2008 and well in to 2009.
What are these Inverse Asset Classes?
David Gratke Wealth Advisors, LLC

10940 SW Barnes Road, Ste 143 • Portland, OR 97225
Direct (503) 972-8987 Toll Free (888) 970-8987 Fax (503) 914-1467 Web davidgratke.com
Blog davidgratke.com/blog
Securities and Advisory Services offered through KMS Financial Services, Inc.
Let us look at the asset class that is at the heart of the inverse asset class strategy
as described above. This tool is called AMP for Actively Managed Protection. AMP is a
tool managed by a 150-year-old international asset manager, Credit Suisse Asset
Management (CSAM). CSAM was hired to manage put options, an asset class that
has been available to institutional investors for decades. Put options, which give the
holder the right to sell a security at a fixed price, move in the opposite direction of
the broad market indices. Put options have received a bad rap over the years, as
many individual investors have been attracted to options for mere speculation.
However, placed in the hands of professional institutional asset managers, put
options serve their intended purpose, which is to mitigate large losses inside of one’s
portfolio.
As can be seen from the chart below, when the markets fell in 2008, the cumulative
return of AMP rose significantly. This is the design of AMP. A cynical individual might
opine, why not just invest in AMP entirely last year? That would be speculating, and
that’s what many ‘retail’ investors do with the asset class, and lose.
By the end of 2008, the conversation was no longer theoretical
As you can see in the chart below, the highest value of AMP in 2008 was on
November 20th, the market low for 2008. AMP was doing exactly as it was required
to do; move up in dramatic fashion while the broad markets plunged. Until this year,
the idea of AMP inside a client portfolio was mainly a theoretical discussion as to how
it could work in a severe declining market. By the end of 2008, the conversation was
no longer theoretical.

The use of inverse asset classes can be found in a number of strategies available
through my firm. Two of the strategies inside my ‘virtual’ toolbox that continue to
offer superior risk mitigation in 2008 and well in to 2009 include:
o Preservation Strategy (PS)

Risk Mandate: One downside risk objective
o Active Return Opportunities (ARO)

Risk Mandate: Includes six downside risk objectives
A quick graphic review of the strategies during fourth quarter 2008 follows:
Below you will see 4QT 2008 (green) and full year (blue) 2008 performance of the
Preservation Strategy compared to a 60/40 mix of S&P 500/Barclays Aggregate Bond
Index as well as the S&P 500 Index.
During the fourth quarter (green), the Preservation Strategy declined a very modest
0.2% as compared to a 11.9% decline for the blend and a 21.9% decline for the S&P
500 Index.
For the full year (blue), Preservation Strategy posted a negative 4.7% as compared
to -22.1% for the 60/40 blend and -37.0% for the S&P 500 Index.
Below you will see 4QT 2008 performance for three risk profiles for the Active Return
Opportunities (ARO) Strategies. For each of the risk profiles, there are three asset
allocation strategies, Domestic, Global and Current Income. The grey bars reflect the
returns for the S&P 500 Index and the 60/40 index blend.

In all ARO profiles, fourth quarter return was much less negative for all strategies
when compared to comparable unmanaged indices.

I offer those of you who are not DGWA clients the following:
A Cup of Coffee and a Second Opinion
When the markets turn as volatile and confusing as they have over the past year,
even the most patient investors may come to question the wisdom of the investment
plan that they've been following.
At David Gratke Wealth Advisors, LLC, we've seen a lot of difficult markets come and
go over the past twenty-three years. And we can certainly empathize with people
who find the current environment troublesome and disturbing. We'd like to help, if
we can, and to that end, here's what we offer, a cup of coffee, and a second opinion.
By appointment, you're welcome to come in and sit with us for a while. We'll ask you
to outline your financial goals – what your investment portfolio is intended to do for
you. Then we'll review the portfolio for and with you.
If we think your investments continue to be well-suited to your long-term goals – in

spite of the current market turmoil – we'll gladly tell you so, and send you on your
way. If, on the other hand, we think some of your investments no longer fit with
your goals, we'll explain why, in plain English. And, if you like, we'll recommend
some alternatives.
Either way, the coffee is on us.
Regards,
David C. Gratke

Addendum:


Investment Opportunities in A Down Market

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Investment Opportunities in A Down Market

Uploaded by

Copyright:

Available Formats

Investment Opportunities in a Down Market

What to do? What to own? Where to invest?

How well are you managing risk these days?

What are these Inverse Asset Classes?

David Gratke Wealth Advisors, LLC

By the end of 2008, the conversation was no longer theoretical

David Gratke Wealth Advisors, LLC

o Preservation Strategy (PS)

o Active Return Opportunities (ARO)

David Gratke Wealth Advisors, LLC

David Gratke Wealth Advisors, LLC

A Cup of Coffee and a Second Opinion

If we think your investments continue to be well-suited to your long-term goals – in

Either way, the coffee is on us.

David Gratke Wealth Advisors, LLC

David Gratke Wealth Advisors, LLC

You might also like