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What Is Your Current Advisor's Investment Theory?

All financial advisors follow a theory about investments when they provide investment advice and services to their clients. Even if they don't have an explicit theory, investment advice is provided within the context of a particular view on how the global economy works.

Since the outbreak of the 2008 financial crisis, a robust debate has been taking place concerning the validity of the current dominant investment theory, Modern Portfolio Theory, and its underlying core concept "asset allocation." There has also been a heated debate about the wisdom of the dominant capitalist economic theories, the so-called Efficient Market Hypothesis and the "free markets" paradigm. As the financial crisis unfolded, advisors following the prescriptions of these theories may have found it challenging to try and protect their clients' investment portfolios. Moreover, over the past decade, investment advice built on these theories may not have seen the returns hoped for.

It is critical that investors know what the prevailing world view of their advisors is. It is this view, perspective or theory about how economies work that forms the foundation of an advisor's investment advice.

There is obviously no guarantee that the strategies we recommend will be successful in the future - the future remains an uncertain entity. However, it is imperative to at least have the discussion about what underlying assumptions frame different investment approaches.

In summary, the Financial Instability Theory states that the current variant of capitalism produces ever increasing fragility during the boom years, culminating in severe crashes and recessions. The theory also states that the way an economy's debt is structured is critical to the stability of the economy. Furthermore, once a new boom starts, the subsequent crash ought to be more severe than the previous one. IF the way institutions and people utilize credit in the economy is not significantly altered this cycle will continue.

It is our opinion that this theory could help to navigate market fluctuations like we have seen over the past decade with the dot com implosion and the more recent financial crisis. If you follow the logic of this perspective then traditional approaches to investing might not provide adequate protection for your investments. This theory states that portfolios have to be constructed, and investment vehicles have to be selected, that account for the boom and bust cycles of modern capitalism.

If you want to learn more about our investment philosophy, we invite you to schedule a no-cost, no-obligation appointment with one of our advisors to discuss our customized asset protection strategies. Email Jeff Savage at jeff.savage@lpl.com, or call us at 541-349-0774.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.