A Tale of Rules

A Tale of RulesA Tale of Rules

(Rules Rule)

What goes around comes around is a well-known phrase that teaches us that eventually we must deal with the consequences of our actions.  While some interpretations are judgmental, to me the phrase means that balance must be restored.

When I was a rookie stockbroker, yes that was what we were called, I would have to make hundreds of unsolicited contacts per week either in person or by phone.  There was no other way to develop a clientele since I did not come from money.  Because of this trial by fire, I developed a particular set of skills.  Skills I acquired over a long career.  Skills that make me ideally suited for dealing with the fear and euphoria of the two moving targets of market and investor psychology.  Only those that have run the gamut can understand the mental transformation that must takes place.  How we think, remember and behave becomes our new neural tapestry.

Walking the fine line between constant rejection and failure while passionately believing you can make a stranger’s life better requires a combination of ego, fear, self-discipline and optimism that becomes permanently imprinted.  Because of this history, I always listen to a stranger’s pitch whether it is solicited or not.  I listen, because—no one has a monopoly on good ideas and as pitches go so goes the industry.  So where is the industry going and why is this A Tale of Rules?

You can clearly see the new wave of the industry based on the calls and emails I receive.  Pitches have changed dramatically over the years.  Pitches, and I hear dozens a month, now come in the form of, these are the rules we follow, instead of, this is the way the manager or smart person thinks or this is why this stock is going up.  It is so pervasive that I can’t remember the last time someone called and pitched me a stock and furthermore, the frequency of calls attempting to introduce a great money manager happen less and less.  But calls about a great strategy, technique or back-test are on the rise.  This is a subtle change but it is growing at an increasing rate.  It won’t be long until it puts a real dent in the antiquated methods that people use to manage money for others or themselves.  Why?  Because there is little doubt that the new rules are better than the old.

To repeat, we get pitches on rules every day and they are growing at an increasing rate.  Most are garbage, but some are very good and were unavailable to individual investors or their advisors until recently.  They were basically only available to high net worth investors through hedge funds.  This is a dramatic shift and one that investors need to understand because whether you choose to interpret it as I do, most portfolios are currently just a set of rules and the rules most people currently use are not as good as what’s now available.

For example, if you own any index fund, you own a set of rules.  The S&P 500 for example is just a set of rules.  If you own a target dated fund, you own a different set of rules.  If you have a target asset allocation or investment policy statement based on your objectives, you own a set of rules.  What’s clear is that you better know your rules.  Why?  Because the rules are evolving and they are getting better and better every day.  Like a video game, you will encounter hidden land mines but you can be wise enough to avoid them.

What does this mean to you?  I expect that the near future will be one where those that follow the right rules will reduce portfolio unpredictability or volatility and increase the likelihood of experiencing a successful outcome.  This is a very good thing because it will add rigor to financial planning.  There is a key word to remember and it’s the word, outcome.

There is a growing set of rules and products available to individual investors under the tag line defined outcome solutions that I believe will find a way into people’s portfolios sooner rather than later.  It’s financial engineering at its finest and it’s coming to a theater near you.  It is so powerful that I believe it will certainly supplement if not completely displace traditional asset allocation, another set of rules mind you.  Why will this happen?  Because to be clear–the purpose of traditional asset allocation is to reduce unpredictability and volatility in order to increase the likelihood of a successful outcome.  If one can reduce that unpredictability or volatility and increase the likelihood of success with a predetermined set of rules—sign us up.

As an example of a defined outcome solution.  There is a solution right now that lets you invest today and receive 100% of the price upside of SPY, the S&P 500, while only experiencing 50% of the downside over the next 30 months.  At the end of the 30 months you start all over again if you wish.  Yet, there are those dinosaurs that would still argue for 100% of the upside with 100% of the downside.  It simply defies logic but we see it every time we do a portfolio review.  The world is changing once again and it is for the better.  It’s time to get on board or at least take a road trip and find out how these solutions work.

Again, I call this tale A Tale of Rules because it describes the way most people invest these days whether they choose to believe it or not.  In a nutshell, rules rule.  What exactly are these rules?  Well if you examine any given prospectus for any pooled asset such as an ETF, ETN or mutual Fund the rules are right there in black and white.  Look at the description of how separately managed accounts will be managed and the rules are also spelled out clearly.  Look under the hood at the algorithmic traders and the rules are once again the driving force.  They explain exactly what the manager/algorithm/computer will do in any eventuality.  So why is this a tale?  Because investing is an evolutionary process or story.  Rules are the latest evolution.  Next month I will publish An Evolutionary Tale so that we can see how it is we got to where we are today.

Starting in 2019, I will make it a habit of publishing an analysis of an individual ETF, or mutual fund with a set of rules that I consider worth exploring.

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