In the past, long-term financial strategy used to encompass keeping a broad-based portfolio to garner moderate risk and moderate returns, said Kevin P. Sullivan, financial adviser with Sullivan & Associates.

But much has changed in the economy, and Sullivan & Associates now uses a modified core satellite strategy.

“There are risks out there that cannot be modeled with a mathematical equation,” Sullivan said. “So we go to the edges — and keep a majority of the money in safer assets, and a smaller portion in more aggressive assets. There is a lot of hubris regarding math and its ability to predict risk — it’s a little bit why we’re in this dilemma.”

One aspect of behavioral finance is “anchoring a problem — taking a short-term movement and extrapolating that to a long-term trend. Individual investors and corporate America get caught up in anchoring,” he said.

Instead, investors should look at long-term goals and the different levels of safety.

“We liken it to a ladder, one extreme is the Y2K redux, folks buying gold, guns and cigarettes and going up into the mountains, end of the world,” Sullivan said.

- Advertisement -

A more pragmatic approach to financial survival would be investing in structured products, securities, especially principal-protected products such as market-linked certificates of deposit that are backed by Federal Deposit Insurance Corp. insurance and guaranteed, say, a minimum 5 percent return at maturity.

Of course, structured products can be illiquid, so they are “not appropriate” for everyone, nor are annuities with living benefits. Each investor needs a personalized portfolio.

“The reality of the investment world is that no one size fits all,” he said.

As for Treasury bonds, Sullivan is a little concerned that they could be the next “bubble” — remember the heady heyday of tech stocks, real estate or dot-com, anyone?

But there are plenty of products to invest in, and which ones an investor chooses has to do with his or her risk tolerance and belief in economic recovery.

“We can set aside most doubts about the U.S. being the engine of the world’s economy,” Sullivan said. “So, if you think the economy is going to come back — and we believe it will — then we look at corporate debt — Triple A rated bonds, safe, the other end of the spectrum, and equities, large-cap stocks.”

Investors who prefer to be aggressive may opt for small cap stocks, international stocks and high-yield bonds — as part of a portfolio.

And for those who have not yet stopped panicking about the economy, Sullivan has words of comfort.

“Without a doubt we live in a nation best-prepared to weather an economic storm. But it doesn’t mean it will be a short storm,” he said. “The good thing to come out of this is that the charlatans have been unmasked.”

From a regulatory point of view, we need a regulator who will watch the entire market, he said. And investors need to learn that if a product or “opportunity” sounds too good to be true — well, then it is.

“If you put all your money with one strategy — whatever that is — you are foolish,” Sullivan said. “I’ve heard of investors with all their money in equities — you need to have balance. And the race is long — it’s not about the best thing for the next 12 months — it’s about the best thing for your timeframe.”

In current market conditions, a lower-risk portfolio, for instance, might have 70 percent in what Sullivan calls “core assets”: CDs, T-bills, highly rated corporate bonds and, possibly, a fixed annuity or annuity with living benefits.

The remaining 30 percent, the “satellite side,” is more aggressive: high-yield bonds, special funds that are doing well, an index fund, or “themes” such as green investing that “both sides” agree are good to invest in.

A moderate-risk portfolio might be adjusted to 60 percent in core assets and 40 percent in satellite assets.

“There needs to be a balance between risk tolerance and risk capacity,” Sullivan said. “An investor may be very risk tolerant but is 75 years old and cannot afford to lose that money — no risk capacity.”

Whereas, a 50-year-old investor with all her money in bonds has a low risk tolerance but actually has a moderate risk capacity.

“Investing is a process — there is no silver bullet,” Sullivan said. And he follows some of the philosophies found in Nassim Nicholas Taleb’s book, “The Black Swan.”

“A complete portfolio needs to have some exposure to high risk, to get your money to work for you, get a return, and then the core assets, to acknowledge the risks you cannot see.”

Rebecca Tonn covers banking and finance for the Colorado Springs Business Journal.