This Month’s Newsletter

Reflections From Over Four Decades Join our Monthly Newsletter October 2018

Carl W. Hafele, CFA, CPA

Co-CIO, Principal

As a student of the investment game for now over 40 years, I am frequently asked a few common questions. They are:

What do you think about these markets?
Are alternatives worth the hassle? Why not just go 60/40 and forget about it?
How do you compare the investment world of personal high net worth (HNW) investors versus institutional investors?

I’ll try to succinctly answer each below.

Markets
I like to answer question one in several fashions. First, markets love to party, and party hard indeed. Invest with them, but realize odds are high that markets – whether stocks, bonds, real estate, etc. – will overshoot on the high side and follow it up by overshooting the downside. Second, sound economic policies are essential for long term success. Valuation levels are important in the long run and worth little in the short run. Last, it truly is “different this time” as we have conducted a great experiment with the Fed quintupling its balance sheet. The unwinding and interest rate normalization will indeed provide some indigestion for all!

Alternatives or 60/40 Mix?
Through many years, traditional investors have had a simple portfolio of 60% stocks and 40% bonds. And it worked for many decades – until we experienced two 50% drops in the S&P 500. Another reason it worked is the fact that interest rates went from over 15% in 1981 to just under 1.5% a few years ago – quite a bull market in bonds!

Yet as rates rise and expected lower rates of returns for equities predicted by many materializes, the 60/40 mix won’t provide investors the needed and expected returns.

Alternatives – particularly if you have access to better managers in the asset class as we do – clearly reduce risk in your portfolio and increase returns over the cycle.

HNW vs. Institutional Investing
With nearly two decades of experience in both investment management worlds, there are some important similarities and noticeable differences. Similarities are the importance of designations – CFA’s, MBA’s, PhD’s, Law Degrees, etc. – which provide more credibility with investors. Asset allocation drives returns and diversification reduces risk wherever you are investing.

In the institutional market, dollar amounts are typically much larger than HNW investors and have many formalities regarding reporting. Institutions utilize third party consultants to ensure the gatekeepers are fulfilling their fiduciary duty. In addition, regarding differences, much has been written about HNW “chasing returns” and typically buying high and selling low – a great recipe for super low returns and quite high levels of risk.

At Lanier, we are a group of experienced and educated investment professionals that love the markets, believe alternatives increase return and reduce risk, and bring the sophistication and experience of the institutional markets to our HNW investors. We look forward to serving our clients for decades to come.

Carl W. Hafele, CFA, CPA, is Co-Chief Investment Officer and Principal at Lanier Asset Management. He is also an instructor in Finance and Economics for the MBA program at Bellarmine University.