Transcript | The investment philosophy

Sarah Widmeyer: Welcome to Conversations on Wealth, hosted by Richardson Wealth, a podcast dedicated to helping Canadians with your total financial picture.

Our approach is unique. We examine wealth through a multi-dimensional lens in order to offer you integrated strategies to grow and preserve the legacy you have built. 

I’m Sarah Widmeyer, Director of Wealth Strategies at Richardson Wealth. Joining me today is Jamie Price, Director of Capital Markets and Investment Products at Richardson Wealth. Welcome, Jamie. 

Jamie Price: Thank you. Great to be here. Longtime listener first time caller.

Sarah Widmeyer: This is gonna be a fun one. Listeners have heard about our approach to behavioral finance on this podcast, as well as our approach to alternative investments. Perhaps it's time to take a step back and talk about general investment philosophy. Jamie, what are the goals and desired outcomes that shape your investment philosophy?

Jamie Price: Right, well, I'd like to start by encouraging everybody to go back to listen to Roman and Craig, in their previous episode, so that'll give you a flavor of where we start and integrate some of their aspects into our investment philosophy. But what I'd like to point out really is that this isn't math. Our industry loves to throw a whole lot of mathematicians and complicated numbers and formulas and make it seem a whole lot more complicated than it is. But really, this is goals and goals are very personal, and they don't necessarily have to include math. While we like to measure outcomes with percentages and returns and other measurable factors like that, ultimately, we need to hit your individual goals to be successful. So what do we look at when we're looking at those goals?

They can be something specific. They're wide ranging. But they can start with something specific, like, what's your retirement number? What's that magic number of dollars, you need to say I'm done and I can retire. Or what's the age at which you'd like to do that? It can be something like paying a child's or a grandchild's tuition, that could be your goal in mind. Or it could be becoming debt free. There's lots of different financial goals that we can work into that. But there's also less tangible goals that can be out there. Something as simple as sleeping at night, or winning. These are things that are very personal to some people and don't matter to other people. And they come in at varying degrees with people. So we just want to make sure that whatever those goals, whether they're measurable or intrinsic can be achieved.

Sarah Widmeyer: That's interesting. So it really is simple, isn't it? It's It's knowing what you want, and therefore you improve the chance of getting there. It's like setting out a roadmap, a plan.

Jamie Price: I like to say discovering what you want. Knowing what you want is half the battle. And, you know, discovering what you want on your own can be difficult. And that's, frankly, why we choose, why we encourage everybody to choose an advisor that will help them understand what their goals are and how to achieve them.

Sarah Widmeyer: So I'm going to try to ask you some questions without industry jargon. One of the things that we hear a lot from clients, and particularly actually women, is get rid of the industry jargon. But here I go, I'm going to ask you something that has an industry jargon, but then we'll break it down.

Jamie Price: You know I have a BA in economics right? That's a BA in jargon, is another way to put it.

Sarah Widmeyer: There we go. So the investment pyramid can be an interesting approach to building out your overall investment strategy. What is an investment pyramid? Let's start there.

Jamie Price: Right. So an investment pyramid is something that we came up with to try and lay the ground work for what a good portfolio building process looks like. And ultimately, these are all tools we use to try and help people understand how they're going to get to those goals. So if you can picture a pyramid, you've got a broad base. It's the biggest portion of the pyramid. If we look at the lower third, it's a massive square, that's going to encompass the biggest volume of the entire structure. So in investing terms, we assume that the biggest amount of dollars are going to be in that base. And that core or base of the pyramid is what you would normally think your core investment strategy will be - its stocks, its bonds, it's mutual funds, put together in an asset allocation strategy that both takes the amount of risk that you want to achieve your rewards and is appropriatein other ways that are going to hit your goals.

Next up, we've got the middle of the pyramid, no real name for it. We got base and the peak but the middle. These can vary in sizes. The core can be smaller or larger. But the middle of the pyramid is where we would put our alternative investments. And again, going back to Romain's episode, you can get a bit of a flavor of what those alternatives look like. But broadly speaking, what we like to do with alternatives is put a little bit of a spin, a personalized spin, on a portfolio. Largely that usually winds up being into one of three buckets. Clients would like to add more income to their portfolio. In this world interest rates are very low, generating income out of portfolios that is livable is much more difficult than it was 10, 20 years ago. We can try to temper volatility. So a lot of clients part of their goals - this is the sleep at night approach - don't like to see big ups and downs. Frankly, it's mostly the downs, everybody likes to see the big ups, but they don't like to see the big downs in the portfolio, like we saw in late 2018, where there was a quick drawdown in the market. Alternatives can be used to mitigate those downsides.

And then the third spin is somewhat opposite to volatility management, and that's more of turbocharging the growth in your portfolio. So there's a certain set section of alternatives that are leveraged, they are built to grow quickly. And you'll accept a certain amount of risk that's usually bigger than other alternatives in that universe in order to try and achieve outsized returns. So that's our core, the peak of the portfolio, this is where it gets really interesting. The peak of the portfolio is what we've called our aspirational peak. And these are investments that are tailored to an individual client. They're designed to do more than just achieve a financial goal out of the portfolio. We like to think of them as something that connects a client to their portfolio. Nothing is actually better for a client's financial well being then for them to be interested in it. And we know there's a lot of clients that have zero interest in managing their financial wealth. They can pick it up Advisor that helps them have zero interest but walks them along the way. But the aspirational portions of portfolio really connect the client with their portfolio. It can be something that's local, it can be something that has deep meaning to them. Or it can be something that they expect unbelievable amounts of growth on and are willing to take that risk. And the reason this is at the top of the portfolio in the smallest portion of the pyramid, is that we size them accordingly. It doesn't have to be a big portion of a portfolio to connect you to that.

Another way we like to call the aspirational investments is these are the cocktail party investments. Nobody goes to the cocktail party and talks about their S&P 500 ETFs or their mutual fund. But lots of people go to a cocktail party and talk about the piece of a brewery they own or their cousins, app company that is going to take over the world with a brand new high technology.

Sarah Widmeyer: That's a great analogy. So Jamie, let's dig a little deeper into aspirational investing then. So aspirational investing, of course involves maximizing upside and taking measured risks to achieve return enhancement. How does that differ from alternative investments?

Jamie Price: Well, oftentimes, we're taking the most amount of risk in the aspirational section of the portfolio. But it's not all about achieving financial goals. So if we make an investment that we expect to have a 10 or 20 times return, these are extraordinary returns, we also expect a fairly high degree of chance that you might lose all your money. And so we size those positions accordingly, and that that makes it very different from the alternative section of the pyramid, or the alternative section of the portfolio where we've tilted the portfolio to achieve a specific goal. These aspirational investments, they connect with more than just the financial returns. Now, they don't all have to be risky, but they do all have to be sized accordingly. And it has to be understood what type of risk you're taking with these aspirational investments.

Sarah Widmeyer: And so is there an appropriate ratio of - you indicated in the analogy of the pyramid, obviously, the core, the base is the biggest and then you you move up, but is there is there an ideal optimized ratio of core to alternative to aspirational? Or is it really determined by each individual investor?

Jamie Price: Yeah, it's so individual. Show me an average client and I'll show you an average portfolio. We like to think none of our clients are average. And really, the results that they achieve might be extraordinary in one investor's eyes and poor in another. And that's because it's more than just the return.

Sarah Widmeyer: Okay. So I'm going to bring you back to the conversation that we have on behavioral finance with Craig Bassinger, where he and I discussed some events that can trigger investor biases and hinder their long term success. From the perspective of the investment philosophy that you've just spoken about, what are some risk profiles that you look at, and what are strategies that you employ to lessen their impact?

Jamie Price: So we like to think of risk in three large buckets. And there's actually more than this, but broadly speaking, there, there are three main types of risk. One of those is volatility. And there's a jargony word for you, and I will try to keep it to a minimum, but but instead, I'll explain what what volatility means. And when you hear the talking heads on TV, say it's a volatile day, they usually mean it's a down day. And this is why up days are not volatile when they're up sharply, they're just up.

Now, volatility is one risk. It's a risk that some clients couldn't care less about. They sleep right through the night without opening their statement at the end of a month to see that they're down 10% one month and up 10% the other. But a lot of clients think that's problem. They don't want to see their portfolio decline in by material amounts. They just want to see nice steady growth upwards. So volatility is one of those things. 

Another risk is credit risk. And credit risk is the risk that the investments you choose actually go bankrupt. That's the simple way of putting it. The jargony way would be they do not performance expected. But there are times where we take risk and they don't work out. And sometimes, especially in the aspirational area, there are times where we take extraordinary risk and we get zeros out of them. We look to the standard venture capital structure and as an example of that. If you talk to a VC manager, they're going to make 10 investments. They expect three of them to return their money, six of them to make zero, like hard zero, and one them to make up the majority of the returns in their portfolio. So credit risk is that phenomenon of these investments not working out. It's not related to the market that they don't work out, they just don't.

And then the third bucket of risk is liquidity. And again, this is where we're into the jargon. Liquidity is very important for the typical retail investor. And I think it's very important that everybody understands what liquidity is, why they need it, and how they can strategically give it up in order to earn an excess return. So anytime we talk about any of these risks, it's giving up or taking on some of these risks in order to give up or take on expected returns. So the reason I say liquidity is so important is because it's the one risk for a portfolio that we can actually manage, we can control it. We can select investments that are going to be liquid that we have a high degree of confidence are going to remain liquid, and we can select investments that are.

Sarah Widmeyer: So private equity would be an example of something that is not liquid. It's something that you're really in it for the long terma and this is not money that you need to pay off a mortgage or a debt or a bill. 

Jamie Price: Right. So when someone makes the choice to invest in private equity, they get to make that decision once. When they make the choice to invest in a publicly traded stock, like a Royal Bank or a TD Bank, they can change their mind the next day, there's usually not much consequence, a little bit of friction, the market might go up or down. But otherwise there's not a lot of consequence of changing your mind. So that's the one side of liquidity is buying things that give you optionality to change your mind and buy something else. The other part of liquidity is maintaining some because the single best returns in the market are when you are able to offer capital when it's scarce. And so having liquidity on the sidelines, so to speak, and being ready to deploy it at a time where liquidity is scarce - and these are usually when markets are selling off - is an incredibly powerful way to make money. And I'm careful not to put that into the bucket of timing the market. Because timing the market is next to impossible. There have been a few people that will prove that the rule isn't true over the course of history, but for the most part, we assume that we can't do it. But having liquidity and being able to use that liquidity to offset lack of liquidity in some sort of investment is a really powerful tool and it's one that we can plan for. So we can take a look at it at a portfolio and say, we'll leave this much or we'll have this much liquid with the intention of ultimately being able to deploy that when we see the opportunity, and it's something that we can plan for.

Sarah Widmeyer: Okay. So something that's come up a few times in this particular conversation is the idea of choice. And there's a million ways to building a strong portfolio. Some clients may look at the selection and choose an option that does not match their needs. How can clients ensure that they're choosing options that are suitable for them?

Jamie Price: Well, one have an Advisor. The simple answer to that is that there are professionals in this industry, ourselves included, that are here to parse through the millions of options. One of the things I love about this industry is that there's a million right answers. There really are.

Sarah Widmeyer: Right, that's what makes a market.

Jamie Price: Yeah, there's no shortage of ways to achieve any particular goal. Even if your goals are very specific. There's still no shortage of ways to achieve those goals. What is lacking is a way of connecting those investments or those choices to something that you're going to be able to live with and stick with. And this is one of the things that that comes back to behavioral biases is people generally feel like they need to act. They will have a bias to act almost at all times. And this is why financial news networks get viewers is because they hear that so and so tweeted this, or some political thing around the world, or the latest GDP number is this. And they feel they need to act, and the TV tells them to. And quite often, it's the opposite. You shouldn't react to what you're seeing.

And the plethora of choices out there, the ability to switch in and out of things, these are all things that feed that bias. So having an Advisor to help you select amongst that massive pool of available investments to hit your goal, I think is probably the single most important factor that can help you hit those goals.

Second thing I would say is determine what's suitable for you. Taking it back to our discussion of risks of volatility, credit and liquidity, decide what you can tolerate. As an example, if you're very young and you're putting away money and you know, you don't have any major purchases coming, liquidity is your friend, you can give it up and try to take outsized returns. If you don't know what the future holds for you, you're in the opposite situation. And being able to use that as a tool will help you narrow down the selections of available investments.

Sarah Widmeyer: So know yourself.

Jamie Price: Right. I always like to say, know yourself really important. I always like to say don't change your behavior to match the investment, you'll fail. Change the investment to match your behavior. It's a lot easier. 

Sarah Widmeyer: Good advice. Common sense advice, really. It's a lot of common sense, isn't it, what we're talking about.

Jamie Price: Its sense, I'm not sure it's that common.

Sarah Widmeyer: That's the problem with common sense. So before we wrap up then are there any other thoughts or any other pieces of great advice that you'd like to give us on how clients can approach finding the right advisor for a long term partnership?

Jamie Price: Sure. Let's not forget, advisors have biases too. We have been shaped by our pasts. As an example, I joined this industry shortly before the .com crash. So I enjoyed a rip roaring equity market for the first two years of my career where I thought it was normal to buy a stock and double it in three or four days. And then subsequently followed up with one of the longest bear markets in history - lasted three years - that's shaped who I am as an investment professional. Every advisor out there has these biases. They're extraordinarily hard to shake. So my advice is, choose an advisor who's a foil to your investment personality, not an enabler. You want someone that is going to be able to work with you, not be confrontational, but be able to rationally point out where you might be making mistakes, or you might be showing one of these biases in the market and choose them accordingly.

It also needs to be a relationship that is fun. It's much more important for you to be connected to your wealth. This is again back to why we do aspirational investing. If you've got an interest in your portfolio, you'll take greater care in it. And choosing an advisor that helps you develop that interest is an important part.

Sarah Widmeyer: Great advice. Thank you.

Thank you, Jamie, for joining us in today's conversation. If you'd like to learn more about some of the topics we've covered on today's episode, you can listen to previous episodes of this podcast, or visit our website for related articles and videos. Please remember to subscribe to conversations on wealth wherever you get your podcasts and follow us on LinkedIn for a broad range of information on wealth strategies. Thank you, Jamie.

Jamie Price: Thanks for having me.

Sarah Widmeyer: And thank you all for listening. Join us again next time.

The opinions expressed are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson Wealth Limited or its affiliates. Past performance may not be repeated. Richardson Wealth Limited is a member of Canadian Investor Protection Fund. Richardson Wealth is a trademark of James Richardson & Sons, Limited used under license.