Sophisticated investment tools for every client
Like a heavyweight title fight, investment plans have a beginning, a middle, and an end. Do your clients’ plans have the dynamic risk-managed strategies and true diversification needed to take the financial punch that markets will inevitably deliver? [dropcap...
arkets responded positively last week in the immediate aftermath of what was perceived as a relatively dovish FOMC statement and a widely anticipated quarter-point rate hike. Said Barron’s this past weekend,...
ack in the roaring 90s, I received an email from someone who was heavily short the market. They called me a “trend-following moron,” along with some even nastier things. Apparently, I irritated them because...
James Billingsley • Edmond, OK Southwest Financial Advisory Group • OneAmerica Securities have come full circle over the years in terms of my investment philosophy and how to best construct portfolios for...
My parents were both in careers that involved science and math. My father was an engineer, and my mother was a computer programmer, so quantitative concepts and applied learning have always fascinated me. I caught the finance bug in high school and started reading everything I could on the subject in my teens.
I studied finance in college, along with computer science and mathematics. While I enjoyed my finance courses and the interaction with my professors, it felt like I was spinning my wheels. I had already read much of the course material on my own. I decided it was important to get some real-world experience and was excited to obtain an internship with a national financial-services company in their financial-planning and investment group.
The one-year internship was a very valuable experience. I learned how impactful financial education and planning could be to individuals and families. The direction our firm recommended for a family’s finances and investments could be influential for the rest of their financial lives. That is a huge responsibility. I worked with experienced advisors on client cases, and that provided a lot of insight on how the process can work best. I was exposed to several third-party investment managers and saw how they applied their philosophies to working investment strategies.
The experience also taught me about what kind of advisor I wanted to be. I determined that when I had my own practice, my relationships with clients would be less transactional and based more on holistic planning.
- Cash flow: Do you have a good handle on an income and expense statement for your household? Are you systematically saving toward retirement?
- Liquidity and debt: Do you have at least six months of expenses covered in a liquid, guaranteed investment vehicle? Do you have a debt-reduction plan in place?
- Protection: Have you recently reviewed a complete insurance coverage plan, including auto, home, life, and business? Would your survivors have enough income to continue to achieve their life goals (home ownership, college, income for expenses, etc.)?
- Retirement income: What after-tax income is required to fund your retirement goals? What income streams will you have? How can your assets and resources best be positioned for the growth needed to achieve your required retirement income?
- Investing: Does your current portfolio really match your appetite for risk? Is it “stress-tested” to withstand the next major market displacement? Is it strategically diversified (not just stocks and bonds, but across management styles, asset classes, and different managers)?
- Estate: Have you met with an estate attorney? Is your estate plan up to date and reflecting any beneficiary changes? Has your plan been coordinated by financial, tax, and legal professionals?
It all starts with the client—their bigger-picture objectives and overall financial plan. Once we have a handle on those pieces, we can talk specifically about investments. A lot will depend on their life situation: Are they preparing for retirement and need to focus on a retirement income strategy? Or, are they younger and have more of a growth perspective over a longer time horizon?
In either case, we spend a lot of time discussing risk with clients, determining their true risk tolerance, and understanding their expectations around investments. This is where we focus on client education. Many clients will say that they are very uncomfortable if their investments lost in the area of 20% to 25%. When we actually analyze their current portfolio allocations, they may have a risk exposure exceeding 50% in terms of potential drawdowns. That can surprise many people.
We also talk about the differences between active and passive investing. Most people believe that investing in an S&P 500 Index fund or ETF is essentially a conservative and passive investment, with the risk spread around the largest, most successful companies in the U.S.
While there is some truth to that, we explain that that is really not the whole story. The S&P 500 has a set of rules, it rebalances, and it loses and gains member companies. In many ways, it is an active investment and people just do not realize how the index components are determined and how they can change over time. But more importantly, while the gains in the S&P 500 can be impressive in a bull market, the drawdowns it can experience make it anything but a conservative investment. By our definition, it is an active investment—just not a particularly good one as far as risk-adjusted returns go.
My passion and life’s work has revolved around studying and pulling apart various investment schools of thought to get at what works best for clients. Modern portfolio theory, the framework of the efficient frontier, and even value investing all have a lot of conceptual appeal, but I believe they have failed most investors. These traditional investing philosophies are essentially built out on a statistical plane where everything has normal deviation.
The problem with financial markets is that we will inevitably face periods where there is anything but a normal distribution of statistics. Things that should not happen over several lifetimes have happened twice in this century. That is one of the core reasons that I think approaching investments from a quantitative basis that focuses on risk-adjusted returns beats passive investing every time. It does so both on an absolute level over longer time frames and in terms of offering clients an investing experience more in line with their true risk tolerance.
We use an analogy with clients to try and boil down some of the theory into an easily understood example. I tell clients that passive investing is the equivalent of putting your family in a car, telling them to meet you at a spot across town, pointing them in the right direction, and then taking away the steering wheel. They might start out on the right path, but without the steering wheel they will quickly move off course.
Active investing is the equivalent of arming your family with the latest GPS technology, constantly updated weather and traffic reports, and a first-class vehicle that can be easily maneuvered to handle all sorts of road conditions along an optimized route. While no investing approach works ideally at all times, which mode of travel, or investing, should make the most sense to clients and their families?
This simple story seems to resonate well with people. I think it captures the essence of the message we want to communicate about using the most sophisticated tools in today’s markets to help our clients to achieve their financial and investment goals.
Eric Sajdak is a partner at Fox River Capital, a fee-based advisory firm and registered investment advisor located in Appleton, Wisconsin. In addition to working with his own client base, Mr. Sajdak is chief investment advisor and the director of college planning at the firm.
After beginning his career in the financial-planning and investment division of a Fortune 500 company, Mr. Sajdak later became managing partner at Sajdak Lenz Investments. He says he then helped found Fox River Capital in 2016 to work with “two very talented partners” who both share his passion for “giving clients access to sophisticated investment tools and advice.”
Mr. Sajdak, who has earned the Chartered Financial Consultant (ChFC) designation from the American College, provides clients with a variety of services, including financial planning, retirement income planning, investment recommendations, portfolio management, and planning for college funding.
Outside of the office, Mr. Sajdak enjoys competing in endurance sports, “hitting up the slopes,” and watching the Green Bay Packers. He lives in Appleton, which he says has a “great blend of smaller-town values and community” with many big-city amenities and entertainment options.
Disclosure: Advisory services provided by Fox River Capital, a registered investment advisor, state registered in Wisconsin. Fox River Capital does not provide tax or legal advice.
Photography by Mike Roemer