Photo by Priscilla Du Preez on Unsplash

The Uncommon Wisdom of Funding Status, and of Coach Herb Brooks

The common wisdom among traditional money managers is that ‘beating the market’ will improve the lives of individual investors. For the sake of bureaucratic complexity, this “wisdom” includes alternative asset classes, active management, economic analysis, market forecasts and risk tolerance questionnaires.

All of this presumes that analysts and strategists possess superior knowledge, and to prove it, they offer “customized” solutions. Yet, if wisdom is a function of knowledge and experience, and knowledge is a function of perception and logic, one must ask: does any of this really work in practice? Our common experience proves, that under stress, it all falls apart.

So, what would be reliable? At Poetic Justice Capital Management, we start with the philosophical principle known as Occam’s Razor. It teaches that frequently, the best solution is the one with the fewest assumptions.

At Poetic Justice Capital, we achieve simplicity by focusing on the facts and values we know about and can control. Primarily, we balance spending goals, savings habits, financial resources, and life expectancy with risk exposure. We then model them against the uncertainty of the future. The result is our investor’s confidence level, on their terms, for living the one life they have with purpose.

In other words, we apply reason to the evidence of reality. In a similar fashion, when Herb Brooks was hired to coach the 1980 US Olympic hockey team, he was facing the reality of Soviet dominance. The common wisdom in international hockey was that in order to beat the Soviets you had to defend their prolific offense.

Brooks knew, that under stress, this falls apart. Instead, he selected players based on their attacking skills, and he used the evidence of game film to gain this knowledge. He then devised the strategy that would give his team the greatest probability of success. He also knew that he needed a defensive strategy that could adjust to extreme conditions: the inevitable barrage of Soviet shots on goal.

At Poetic Justice Capital, defense is the purpose of our allocation to fixed income securities. This is because our equity allocation is our offense, and risk exposure is one key variable we can control. In other words, high quality bonds are the goaltender defending stock market volatility, particularly under extreme market conditions that no can predict.

Unfortunately, the common wisdom of asset allocation, manager selection, market timing, and ‘stay the course’ increases potential assumption errors. This is because the traditional performance benchmark is the wrong one — an arbitrary index like the S & P 500. Our performance benchmark is the life of the investor.

In order to minimize the possibility of failing under stress, we conduct regular Stress Tests to determine our client’s Funding Status — their confidence level for meeting or exceeding their lifestyle spending goals. It also identifies the simplified strategy that helps avoid unnecessary sacrifice and risk.

Having knowledge of a forward-looking Funding Status (overfunded or underfunded) — one rooted in the facts of reality, personal aspirations, and prudent action, allows our clients to take ownership of their futures. Together, we anticipate the possibility of extreme events, make informed decisions, and help clients live the one life they have with confidence.

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Mark Shupe

Mark Shupe

Mark Shupe writes about economic and political freedom.