Fisher Investments: FOUR RULES TO LIVE BY
How does Fisher Investments tactically build
and manage portfolios to execute a long-term strategy?
Navigating the market can be a rough ride, but
the job of Fisher Investments is to steer your
portfolio in what we believe is the right direction
and keep it on what we consider the right path.
There will be times when the right direction feels
wrong and uncomfortable, and there will be times
you'll be tempted to go in the wrong direction
because it feels right. Beginning with four basic
rules of portfolio management will give you an
investment compass, and remembering these four
rules will keep you from veering away from your
objectives.
1. Select a Benchmark
First, select an appropriate benchmark. An
appropriate benchmark is necessary to measure
relative risk and return, and should be consistent
with the time horizon for the assets. A benchmark
provides a framework to construct a portfolio,
manage risk, and monitor performance by comparing
rates of return over time.
Tactically, a portfolio should then be structured
to maximize the probability of consistently
beating the benchmark, thus maximizing the
likelihood of long-term success. Unlike simply
aiming to achieve some fixed rate of return
each year, which will cause disappointment
when the capital markets are very strong and
is potentially unrealistic when the capital
markets are very weak, a properly benchmarked
portfolio provides a realistic guide for dealing
with uncertain market conditions. Your time
horizon and required rate of return are major
factors in determining the most appropriate
benchmark.
2. Analyze the benchmark's components and
assign expected risk and return
The object is to beat the benchmark fairly
consistently while controlling risk relative
to the benchmark. For each security, sector,
and country that comprise the benchmark, assign
an expected risk and return. Anticipation
of market conditions in specific sectors and
countries allows us to weigh them accordingly
in portfolio construction.
3. Blend dissimilar securities to moderate
risk relative to expected return
The basic premise is to overweight those parts
of the benchmark that are expected to outperform,
and underweight those parts expected to underperform.
Attempting to beat the benchmark means making
calculated decisions based on which components
we anticipate will outperform others. Our
core strategy consists of overweighing countries
and sectors concentrated on those allocations.
However it is also essential to build a counter-strategy
into the portfolio, in case the core strategy
fails to deliver. We do this by blending in
negatively correlated securities and holding
them in underweight positions relative to
benchmark to moderate that risk. For example,
if technology stocks are expected to outperform,
we may also hold some stocks that tend to
zig when technology stocks zag, like pharmaceuticals,
to offset relative risk if tech underperforms.
4. Always remember that we could be wrong,
so we don't veer from the first three rules
Over-confidence is a dangerous trait in portfolio
management. It allows one to divert from investment
objectives and assume sub-optimal levels of
risk. That's why we always remember we could
be wrong, so we maintain our discipline and
don't forget the first three rules.
Disclosures
General
Any investment program may be volatile and
can involve the loss of principal. Past performance
is no guarantee of future returns. Not all
past predictions were as accurate as those
represented in the content of this website.
Ken Fisher's Books
Ken Fisher’s books are not regarding
any advisory services provided by Fisher Investments
or performance returns by clients of Fisher
Investments, and represent only Ken Fisher’s
personal opinions and viewpoints. Fisher Investments
manages its clients’ accounts using a
variety of investment techniques and strategies
not necessarily discussed in Ken Fisher’s
books.
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