As the year draws to a close, we extend our heartfelt gratitude to all those who have accompanied us on this remarkable journey. This year marks our tenth anniversary, and it has been a decade filled with significant milestones. Among them, we celebrated the ten-year anniversaries of our first two strategies in October and December. We are proud they have met our expectations by generating better risk-adjusted returns relative to their respective benchmarks while keeping experienced declines at lower levels than those experienced by the benchmarks. [Please note that past performance is no guarantee of future returns.]
Over the past ten years, we have navigated many market environments, compressing a wide array of financial events into a relatively brief timeframe. While the Global Financial Crisis had already receded into the past when we embarked on this journey, the subsequent decade was anything but uneventful.
Soon after we started, the markets experienced Greece’s debt default in 2015, which posed a significant risk to European banks. Shortly after that, we witnessed the bursting of the oil bubble in late 2015 and early 2016. The uncertainty continued with the Brexit referendum in June 2016 and the volatility shock in early 2018, resulting in five years marked by substantial disruptions in the financial markets and market returns that were far below historical trends.
However, the challenges did not stop there. A liquidity crisis emerged in late 2019, followed by a global economic standstill induced by the COVID-19 pandemic. Inflation, Russia’s invasion of Ukraine, historic interest rate increases, and notable bank failures further contributed to the unprecedented turbulence that defined our first ten years in business.
Reflecting on these past ten years, we are proud to have weathered these storms, adapting to a dynamic and ever-changing financial landscape. As we move forward, we remain committed to our philosophy and are excited about the next decade’s opportunities.
We have recently seen significant growth in our newsletter recipients, prompting us to commemorate these ten years by reviewing our investment philosophy and process. Our approach begins with an examination of historical investment trends. When considering the S&P 500 as a representation of the U.S. equity market, we find that equities have yielded positive six-month returns roughly 70% of the time, dating back to 1929. Equities have experienced a slight negative six-month return (a decline of 10% or less) about 20% of the time. Only the remaining 10% of the time has the six-month return shown a decline greater than 10%.
Those statistics argue for a fully invested stance… most of the time. Unfortunately, those infrequent large market declines often lead to investor apprehension, causing them to exit the investment markets for extended periods, fearing even more substantial declines. And adding to the pain, those leaving the market out of fear typically lack a clear reentry strategy and have tended to miss out on the recovery and, therefore, lock in the market’s decline.
Our investment philosophy respects the empirical truths that investment markets typically experience positive returns and that the volatility within the markets can lead to an emotional response that forfeits the market’s potential. This is why our process aims to minimize these pronounced downturns through dynamic asset allocation, hoping our clients never reach that point of fear and uncertainty. Counter to the emotions felt, our process attempts to define a re-entry plan built on a rigorous and disciplined analytical process.
This approach of navigating around market storms has become known as Regime-Based Investing. Our firm did not invent it, but we have been recognized as an early participant in the field and an innovator in methods of defining those regimes.
In contrast to many who attempt to forecast the economic landscape to identify the various market regimes, we’ve chosen a different route. We focus on understanding market risks and detecting shifts in the risk environment. We believe that assessing current market risk and monitoring changes can lead to a more proactive response, avoiding reliance on economic forecasting, which, as many of us have experienced, can be unreliable when predicting timing and severity.
Attempting to reduce portfolio risk prior to a market correction is extremely tough, yet it pales in comparison to adding risk back into a portfolio (i.e., buying back in) during the correction. Much like a pilot flying in zero visibility, you must focus on your instrument panel and trust they provide the right information. Our analytic framework aims to do just that and helps to limit the emotional drag that hits all of us during periods of immense uncertainty.
In addition to our focus on dynamic asset allocation as a strategy for managing market turbulence, our philosophy is deeply rooted in cost reduction, a key component to investors’ long-term returns. The main cost drivers in this context encompass both the direct expenses associated with the investment vehicles used in portfolios and the indirect costs arising from the performance drag typically encountered by asset managers attempting to outperform benchmarks through individual stock selection.
We employ exchange-traded funds (ETFs) as investment instruments to address these cost concerns. ETFs enable us to manage expenses effectively while gaining the necessary investment exposures within our strategies. When we initially adopted this approach ten years ago, we noted that ETFs were approximately 25% of the cost of the average active mutual fund. Interestingly, despite a drop in fund costs over time, we’ve observed that the cost differential between mutual funds and ETFs has remained relatively stable. Furthermore, our argument regarding the underperformance of active managers still holds weight, as the vast majority of mutual fund managers continue to trail their benchmark indices (source: Morningstar).
The last decade has seen continued innovation within the investment world, and we continue to assess if better options exist for our clients. To date, we see most of the innovation focused on active managers justifying their high fees rather than improving client outcomes. We will stick with the same process that we instituted at our start.
We aim for our investors to understand that our philosophy and process are rooted in a deeply analytical foundation with a strong dose of humility. To illustrate our analytical approach, we often refer to Warren Buffett’s quote: “We aim to be fearful when others are greedy and greedy when others are fearful.” Additionally, we emphasize that investing is a marathon, not a sprint, where our goal is to be approximately right rather than precisely wrong. Over the past decade, this blend of analytical rigor and humility has proven advantageous for our clients, and we remain confident it will continue to serve them well over the next decade.
This report is for informational purposes only and does not constitute a solicitation or an offer to buy or sell any securities mentioned herein. This material has been prepared or is distributed solely for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. All of the recommendations and assumptions included in this presentation are based upon current market conditions as of the date of this presentation and are subject to change. Past performance is no guarantee of future results. All investments involve risk including the loss of principal.
All material presented is compiled from sources believed to be reliable, but accuracy cannot be guaranteed. Information contained in this report has been obtained from sources believed to be reliable, Auour Investments LLC makes no representation as to its accuracy or completeness, except with respect to the Disclosure Section of the report. Any opinions expressed herein reflect our judgment as of the date of the materials and are subject to change without notice. The securities discussed in this report may not be suitable for all investors and are not intended as recommendations of particular securities, financial instruments or strategies to particular clients. Investors must make their own investment decisions based on their financial situations and investment objectives.