Stone & Youngberg Asset Management Comments on the Effects of Volatility and Cost on Portfolio Return

Commentary from Paul R Touchstone, CFA, Senior Investment Strategist and Portfolio Manager

SAN FRANCISCO--(BUSINESS WIRE)--Today most of the world’s equity markets are up over 100% since hitting their March 2009 lows. No doubt many investors experienced all or much of the decline to the market’s nadir. Unfortunately, they also may have gone on to miss a good portion of the rally that followed.

The market turmoil of recent years exposed flaws in traditional portfolio design. Despite the advantage of broad diversification, even carefully risk-balanced portfolios experienced substantial declines when the markets were in free-fall and predictive models failed. Investors who diversified into limited partnerships, hedge funds, and private equity often sacrificed liquidity, transparency, and control for the illusion of reduced volatility. Other investors lacked access to the tools they needed to implement their market view. Still others believed their investment decisions should be binary – either participate or go to cash.

Presented with so few alternatives to help buffer the reach of the Great Recession, it is no surprise that today many investors feel disenfranchised from the financial industry.

The Myth of Higher Return from Higher Risk

Despite the markets’ gyrations, the value proposition on most of Wall Street hasn’t changed. Individual investors continue to be lured to the largest financial institutions on the premise that lower transaction costs, access to institutional managers, and proprietary products can provide superior returns along with the security needed to meet their financial objectives.

While the practice of risk management has evolved over the past forty years, private investors still suffer the same fate each time a market crisis occurs. Wall Street’s behemoths have cowed their clients into believing that if they take on less risk, their long-term goals will be harder to achieve; thus, to attain higher returns, investors must be willing to take on more risk and subject their portfolios to more volatility.

Stone & Youngberg disagrees with this investment paradigm. Volatility is not an unpredictable, wild ride where investors fasten their seat belts and hope for the best. Rather, when volatility is managed strategically, there can be measurable benefits associated with it.

The three hypothetical portfolios shown in the accompanying graph are constructed to illustrate the impact of volatility on asset growth. Each portfolio has an identical average annualized rate of return of 10%, though the net growth of $10 million invested over a 20-year period ranges from $19.8 million to $52.9 million based solely on the influence of volatility.

Wall Street Success is Not Necessarily Investor Success

“Size equals service” is another myth that can distort portfolio return. From their unique position as primary beneficiary when acting as custodian of their clients’ assets, large Wall Street firms generate income above and beyond management fees and transaction costs. Investing client capital in proprietary money market funds and selling proprietary products such as mutual funds, annuities, structured products, and CDs yields handsome recurring revenues to the firm. Investors whose money is being put to work, however, may not be seeing their financial interests best served.

When investors watch their portfolio’s value rise and fall with market volatility, at the same time as their capital is being leveraged to enhance their brokerage firm’s bottom line, poor performance starts to feel increasingly like poor service.

Return on Investor Portfolio Comes First

If not properly managed, volatility can destroy wealth, while fees, taxes, and the costs of investing capital can create a drag on asset growth. Investors can mitigate their exposure to these variables, however, by looking behind the curtain of large banking corporations and demanding from investment professionals what is rightfully theirs: an investment portfolio across all asset classes that is transparent, fee cautious, liquid, results driven, and sustainable.

At Stone & Youngberg, we take a different approach to investing assets – an approach where volatility is a core focus and portfolios are optimized for investor return, commensurate with risk, rather than firm return. If you believe you’re not benefiting from a risk-managed, cost-effective investment strategy, or if you would like to learn more about our firm’s approach to asset management, please give your Stone & Youngberg Investment Executive a call.

About Stone & Youngberg Asset Management

As a complement to our fixed-income brokerage services, Stone & Youngberg offers fee-based asset management to individuals and institutions. Our approach relies on reducing volatility and minimizing exposure to risk. This is designed to increase the probability of meeting our investors’ financial objectives. Disciplined risk management, planning, and communication are essential in formulating long-term, successful investment strategy.

To learn more, please give us a call at [phone] or visit www.syllc.com/amg.

About Stone & Youngberg: Stone & Youngberg Holdings LLC is a financial services company providing a range of products and services through two subsidiary businesses. Stone & Youngberg LLC, founded in 1931 and member FINRA/SIPC, specializes in the origination and sale of fixed-income securities. The firm led or co-managed the sale of 945 municipal bond issues totaling $20.6 billion over the past five years.¹ In addition to bond underwriting and sales, Stone & Youngberg provides investment services to individuals, institutions, and government agencies and offers a wide variety of tax-exempt and taxable securities. S&Y Capital Group LLC is a private real estate investment, development, and consulting company.

Stone & Youngberg is headquartered in San Francisco with offices in Los Angeles, San Diego, New York, Chicago, Phoenix, AZ, Albany, NY, Richmond, VA, and Annapolis, MD.

Stone & Youngberg’s asset management services are only available in states in which the firm and/or its associated persons are registered or exempt from registration. Information presented in this article is not intended as a solicitation for products or services or as a recommendation of any investment or investment strategy. This article is for informational purposes only and is solely the views of its author. These views are subject to change at any time based on market conditions, and the author does not undertake to update the reader of any changes in opinion or information.

The reader should evaluate his or her personal situation with a financial professional before investing. The information presented herein should not be construed as investment advice or guidance as to the appropriateness of any investment decision or as a recommendation of any specific security, sector, or strategy. Past performance does not guarantee future results. All investing involves risk. The value of an investment will fluctuate over time and it may gain or lose money.

¹ Thomson Reuters 2011

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