Risk Management

1. Identify & Mitigate Unacceptable Risks

While the elimination of all risks is impossible, there are certain risks that are unacceptable and must be avoided:

• Permanent Loss of Capital
• Longevity Risk

We go to great lengths to mitigate the impact of both risks.

2. Construct an All-Weather Portfolio

Many financial advisors believe that a portfolio diversified by investing in different asset classes such as domestic stocks, international stocks, real estate and bonds is the best way to manage risk.

We’ve lost track of how many times we’ve reviewed a prospect’s portfolio to find that he/she was invested in more than 10 different asset classes and multiple high-fee mutual funds that all invested in nearly identical securities.

Not only does this level of over-diversification lead to mediocre results, but, worse, it often fails when you need it the most, as asset values typically fall in unison during a crisis.

Why doesn’t asset class diversification help manage risk? The short answer is that most investments bear the same two fundamental risks: business cycle risk and interest rate risk, sometimes both.

Moreover, most investments are susceptible to violent price swings due to investor psychology and herd behavior. Think everyone rushing for the exit during a fire in a crowded theater.

At Fortress Capital Advisors, we recognize these shortcomings and, as a result, take a unique approach to portfolio construction and risk management:

• Rather than focus on asset allocation, we build portfolios comprised of complementary investment strategies that exploit market inefficiencies.
• Every investment has a specific role within the portfolio that compensates for specific risks. Otherwise, we don’t own it.
• Investments are weighted in a manner that balances risk and reward while incorporating client-specific needs such as income generation.

Rather than build portfolios where nearly every investment goes up or down in tandem, we seek balance. In our experience, all-weather portfolios that provide stable and consistent returns do a much better job of achieving client goals than those with returns that vary wildly from year to year.

3. Monitor & Adjust

Constantly reacting to the never-ending stream of financial data and news is a recipe for failure, yet this type of behavior is surprisingly common among amateur and professional investors, alike.

On the flip side, a simplistic strategy of setting an investment allocation and readjusting target weights periodically, is naïve and dangerous, especially for retirees living off of portfolio income.

Both approaches leave investors dangerously exposed to market shocks.

That’s why we’ve developed our own proprietary, rules-based risk management system which helps us change course before heading into a major storm. We’ve spent thousands of hours researching which data points and indicators have the most predictive power, so we can tune out the noise while dynamically managing risk and avoiding major losses.