Feeling, guessing, and hoping are not tools of risk management.
For us, the math means the language if the universe: calculus.
Non-linearity. Bayesian Inference. Price, volume, volatility, volatility of volatility, rate of change. Probabilities.
It's the pattern of movements and the rate of change of those movements that drives the signals. What are the #’s doing? What is that telling us? What kind of measured factors are not subject to opinion?
Narratives you hear in financial news and social media should not drive your emotional decisions when it comes to investing your hard-earned capital. There should be a process behind these decisions.
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We take fear and stress out of investing, while still having fun.
If you're feeling emotional about markets and your decisions, it's time to reevaluate. Financial media has a purpose beyond reporting financial news. They have to stir emotions. Unfortunately this doesn't work well for investors, given the natural, embedded, and often inconspicuous psychological / emotional behaviors that drive our decisions.
If you do not have an investment process in this era, you are putting yourself at great risk.
We have clients that range from DIYers, to those who choose to have us manage assets entirely. We encourage you, if you already enjoy trading, to maintain an account on the side for this purpose, while applying risk management to other assets. Regardless of how we choose to manage assets in the whole, complex picture, there must be a process.
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*Hedgeye Risk Management is mentioned in this video. For more information, please visit our research/providers partners page for a link to their website and services.
Some notes on how we approach money management
There are two processes in understanding how to approach money management for you.
The quantitative process involves risk tolerance questionnaires (RTQ's) and algorithmic analysis of risk. We look at your risk tolerance and risk capacity, as well as time horizon and purpose / need for specific assets.
The qualitative process involves in-depth conversations with you, walking through a series of specific questions to understand how to match the right form of asset management and course of financial planning with your values, vision, mission, and goals.
Algorithms, Quants, and Roboadvisors
Automated systems are helpful. We use them in some cases for efficiency when your risk profile is better served doing so. One of the benefits of working with Altruist, our partner custodian and trading platform, is that they provide a marketplace of professional money managers that we can screen and use for you. And their system, noted for transparency and ease of use, strips out hidden and layered fees, resulting in a clean, clear, efficient manner for managing your assets.
However, you should be aware that the tech side of the financial industry involves claims of using artificial intelligence, or "AI". These claims can be misconstrued, because "AI" in its current state in financial management is not free-thinking. This means that any financial models / computer algorithms, while able to "learn" and record for future decision-making, are still operating from human inputs and levers. There are rules / parameters / decision points entered into these algorithms by humans, and are still subject to human behavior.
The exact percentage isn't known, but industry estimates suggest that 80%-90% of the volume of market trading is coming from non-human sources, which includes terms you've likely heard such as "algorithms, machines, models, quants, roboadvisors", etc1,2,3
We run a series of active/strategic risk-managed portfolios through Altruist, our partner custodian. These portfolios may use a combination of ETF's (exchange-trade funds), index funds, actively managed mutual funds, and individual stocks to provide exposure to as many asset classes as deemed necessary. These investments can include equities, bonds, commodities, precious metals, real estate, etc.
While we use a variety of vetted sources for understanding the state of capital markets, most of our core research comes from Hedgeye Risk Management. Their group built on the research and models designed by Ray Dalio and Bridgewater Associates, who found that economic conditions could be factored down to four basic scenarios: growth is either accelerating or decelerating, and inflation is either accelerating or decelerating.
The following chart reflects one of the tools produced by Hedgeye Risk Management that we use as a starting point for understanding economic scenarios from the perspective of growth, inflation, and policy (central bank, Fed, gov't), and how markets may respond. We should stress that this is merely a starting point, using backtested data against these scenarios. There are additional steps, including algorithmic analysis of price, volume, volatility, and rate of change that goes into determining current scenario and how trading is to be implemented. We're providing this as a point of conversation to discuss our approach to managing portfolios.
NOTE: This chart is for representation/example purposes only. It should not be used as a guide for investing. There are many factors and signals involved in the process of determining investment decisions. It is meant to show a baseline / starting point for understanding our actively managed risk portfolios. Chart informed by Hedgeye Risk Mgt, LLC.
It's not about "going to cash", or "risk on / risk off"
Types of financial instruments we trade in our process
Do you trade more than just stocks?
An excellent visual for the above topic can be found here, at Visual Capitalist:
What is "Beta" and why does it matter?
What is "Standard Deviation" and why does it matter?
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