The Holy Grail in investing, if there was one, is an investment that provides equity-like returns without the discipline and stomach often required to see such returns. This is what every investor hopes for. We want a short cut. And Wall Street knows this! There are investments that allege to provide growth and income while protecting or limiting the downside. As investors, one of our biggest nemesis is volatility, so these types of investments are very alluring. They tend to perform satisfactorily in good markets, but they can fail miserably in bad markets – the very conditions we expect them to do well. And a few blow up completely.

March 2020 Example

The Allianz Structured Alpha 1000 Fund was marketed as a hedge against a downturn. Their lead portfolio manager said the fund will “protect ourselves from catastrophic shocks.”[1] It was led by a very experienced team of financial professionals. It sounds like a great investment opportunity! So, how did it do in the catastrophic loss in March this year? It lost 97% of its value and liquidated shortly thereafter.  If this were the only example, we could chalk it up to an anomaly. Unfortunately, these happen more than we hear about.

February 2018 Example

The LJM Preservation and Growth Fund was marketed exactly as it was named. Preservation and growth? Wow, exactly what investors want. The fund’s marketing materials stated, “Make Volatility Your Friend.” Sounds good to me! It did OK until we had a spike of volatility in February 2018. It was a very short-term spike, but it was sufficient to tank the fund. Over 90% losses in one month; fund liquidated.[2]

Buyer Beware

Risk management isn’t about finding the Holy Grail (it doesn’t exist). It is about having the right allocation for you, knowing what you own, and transparency in execution. Investment success isn’t about owning the “best” fund. It’s about having the discipline to stick with your plan when times get tough. There will always be something more attractive than what you own. Investing is a constant battle of tradeoffs such as Risk/Return and Feeling/Rationality. Beware of investments that sound so good we are willing to abandon our own investment plan.

Beware of the wolf in sheep’s clothing.

[1] WSJ May 20, 2020. “The Day Coronavirus Nearly Broke the Financial Markets”

[2] Barrons Feb 10, 2018. “How LJM Preservation and Growth Failed Investors”

If you’re considering working with us here at Mosaic, we invite you to learn more about who we serve and how we help them. You can also contact us with any questions you have.

By Marcus E. Ortega, ChFC, RFC | Investment Advisor Representative | CEO of Mosaic Financial Associates & Orthopaedist Advisory Group | Securities and advisory services offered through Cetera Advisors LLC, Member FINRA/SIPC, a broker/dealer and a Registered Investment Advisor. Cetera is under separate ownership from any other named entity.

©2020 The Behavioral Finance Network. Used with permission.