2011 Year In Review: Balentine Risk First Approach to Investing

risk2011 was filled with many ups and downs – with issues ranging from natural disasters to politically-created ones affecting markets. In this three part series, we will look back at some of the biggest factors that affected the economy and examine their potential impact going forward. In Part One of this series, David Damiani, Director of Risk Management, discusses Balentine’s risk first approach to investing and the benefits of approaching investments in this way.

On a fundamental level, when Balentine began, we recognized that the world was in a low-return environment that offered many challenges to investors and their spending needs. In order to bridge the gap between expected and possible returns, the Investment Strategy Team (IST) created our building block approach to asset management. The building block approach categorizes investments using a multitude of risk factors including liquidity, active versus passive and income potential. We establish risk parameters first and then construct a set of investments that provide the greatest reward for the risks borne. Once the parameters are defined, the IST continually evaluates if our original investment decisions are applicable to the constantly evolving global environment.

This risk-first portfolio design has proved paramount over the last few years, which have been filled with a lot of volatility and even more investor uncertainty. Robert Balentine said it well earlier this summer: “For the last few decades, we have spent too much, saved too little and lived beyond our means. Now, we are going through a de-leveraging cycle to pay for our past transgressions.” One of the results of the de-leveraging cycle has been shorter and sharper economic cycles, like ones experienced this year.

No one can control the markets, so during these turbulent times, Balentine focuses on what we can control: the fees paid and the amount of risk taken in portfolios. As discussed in “The Upside of Down Markets”–“The key to long-term performance is (much) less about beating the market than it is about managing downside. A defensive, risk-averse approach to investment strategy – the type of strategy we have crafted at Balentine – is a tough sell when the markets are going up. But look at Buffet’s record, and you will see that his secret formula is simply this: not losing money in down markets.” 

Another key strategy requires that investors take a long-term approach. With all the advantages of modern-day technology, our society has become so focused on instantaneous results, having a long-term vision is often times easier said than done. The constant presence of financial information – from stock tickers zooming across screens in elevators to finance apps on our smart phones and tablets – make it hard to focus on long term investing. However, history tells us that true investing rather than short term trading will pay off over the long term, and we believe this to be true for Balentine portfolios as well.

Long-term investing is also a lot easier when clients do not have to touch their investments, and for this reason, we have designated the Liquid building block specifically for clients who spend out of their portfolio. The genesis behind this idea ”is to immunize near-term spending requirements. By keeping between one and three years of cash on hand – depending on the risk environment – clients do not have to sell assets at a depreciated price in order to satisfy spending needs or capital calls. Preventing spending in a down market and allowing portfolios to rebound makes long-term investing an easier feat.

As 2012 approaches, we will continue to utilize the building block approach and look at portfolio construction with a long-term, risk-first approach. Investing is a marathon, not a sprint, so thank you for entrusting us for the long haul.

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