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Philosophy

Why do we make mistakes as investors? For starters, financial markets are unpredictable. And because of this, some investors yearn for a measure of control to deal with this uncertainty, buying into rules of thumb about investing that sound good, but often make matters worse.

Popular rules such as "buy and hold" and "stocks for the long run" are both based on the premise that markets always rebound from any shortfall, but we know this isn't true. Otherwise, investing would be easy. All it would take is a little patience.

"Doing your homework before investing" also sounds like sage advice, but even the most dedicated analysts who do nothing but examine companies and talk to insiders all day are rarely consistent in their predictions.

To avoid these and other common mistakes, Path Financial's approach focuses on the following three strategies:

Diversifying with a purpose.

Most investors understand that it is unwise to put all their eggs in one basket, so they diversify to smooth out portfolio returns. This works great in bull markets. But during periods of sharp market distress, when panic takes over and everything is for sale, the benefits of diversification disappear. Prices become highly correlated on the way down. That’s why purposeful diversification entails more than just putting a bunch of assets together. Our process examines how asset prices behave in different market conditions, and responds with a portfolio that adapts to those changes.

Rebalancing on a schedule.

Putting together a portfolio with a multi-year horizon does not work. People simply cannot reasonably forecast the future. Just as the Dow Jones Industrial Average was climbing to a record high in late 2007, barely a year later it dropped to half of its value. Investing for the long term sounds good, but in reality the success of a portfolio built with long-range horizons depends on sheer luck. At Path Financial, we target objectives one quarter at a time to build sustainable, long-term results for our clients.

Keeping an eye on the downside.

Assets tend to trend, both on the upside and on the downside. This means that once a trend is established, it is likely to go further than most think possible. Therefore, when stocks are in a free-fall, we find it better to cut losses than to wait for a turnaround that might come too late. That’s why properly placed exit points for each position in a portfolio are essential in preventing disastrous losses that can become exceedingly difficult to repair. Attempting to limit downside risk is at the core of Path Financial's process.

Asset safety is provided by Charles Schwab & Company, a leading financial institution with over $1 trillion in client assets. Contact us for more details.

Want to know more?

Ask for our free Investment Process report for a detailed discussion of how we apply advanced portfolio management techniques to build portfolios that stay relevant to prevailing market conditions.

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