On July 1, 1980, the newly constructed Hyatt Regency Hotel in Kansas City, Missouri, featured several suspended walkways crossing its multistory atrium. Preliminary plans called for the fourth-floor walkway to hang from the ceiling, connected by steel rods. In that design, the rods would barely hold the weight of the walkway itself, and would not have passed local building codes. Those supports were included in the final construction, and to make matters worse, the second-floor walkway was suspended from the fourth-floor walkway directly above it, doubling the load on those parts.
On July 17, 1981, the linked walkways crashed to the dance floor below, killing 114 people and injuring another 200. The structural engineer in charge of the walkways blamed the design flaw on a breakdown in communication, but the Hyatt Regency walkway collapse has become a popular case study in the ethics of engineering.
The Hyatt Regency had to fork over $10 million in settlements due to poor engineering decisions. Are you prepared to let poor engineering decisions cost you what you have invested in your portfolio?
When it comes to putting together your investment portfolio, I can’t stress this point enough: engineering matters. Unfortunately, proper engineering isn’t a clean strip of highway laced with all green lights on the way to your financial destination. It can come with various potholes that could easily, if not properly navigated, knock the wheels off any smooth-running vehicle. And if you think it can cost a lot of money to fix your car, imagine what the cost would be to fix a badly-damaged portfolio. Ouch!
When it comes to properly engineering your portfolio, there are three potential “potholes” you need to be aware of, so pay attention (no driving and texting, please). They are:
2. Three Critical Components
3. Common Sense Rules
Misconceptions start with the misplaced perception that access and fees are the only determining factors for returns, as follows:
- Access – you can go online and trade thousands of options.
- Fees – how much you are going to pay in management and/or transaction fees.
If, indeed, you are being encouraged to go online and trade without help or guidance, then who exactly is leading you down this misguided path? That’s easy; journalists, who need you to keep reading their articles, and websites, that entice you in and then encourage you to speculate and gamble.
But having information, whether it is good or bad, isn’t all you need to make a well-placed investment. What good are having the tools if you don’t know what to do with them? Hand a brain surgeon a scalpel and I’m feeling pretty good about that patient lying on the table. But hand me that same scalpel and, well, maybe that patient wants to be somewhere else. Bottom-line: Having access to scalpels does not make you a brain surgeon, anymore than having access to a lot of investment products makes you a great money manager. Access and fees are not the only determining factors for returns.
THREE CRITICAL COMPONENTS
The first thing you need to know about engineering is that how you engineer a portfolio is critical, particularly as it speaks to what goes in and at what specific percentages.
Determinants of Portfolio Performance
- 1.8% Market Timing
- 2.1% Other Factors
- 4.6% Stock Selection
- 91.5% Asset Allocation
How can some say engineering is not important when it is seemingly the most important factor? It only makes sense that the more access you have, the more likely you are to build an inferior engineered portfolio. It can’t be possible that all pie charts are equal, but to a novice they can look the same. Even professionals have a hard time discerning the differences.
For instance, let’s look at two pie charts. How would an investor know the difference?
Differentiating well-engineered portfolios from poorly-engineered portfolios is hard because small changes can have massively different outcomes. Just as a novice wouldn’t be able to tell the difference between a well-constructed bridge and one that’s about to collapse. But they all have one thing in common: Engineering matters. And not only do you have to engineer a portfolio, you also have to have a strategy to execute throughout time. Because you can have a well engineered starting point, but still destroy your results over time. You can’t just get in a plane with no experience and fly it. Nor do you want to fly in a plane with a pilot who has no experience.
Even if you start off with a well-engineered portfolio, you have to execute and stick with it over time. Here are some execution fails by so called “professionals”:
- Chasing commodities
- Chasing gold
- Chasing tech stocks
- Panicking during a crash
Engineering and execution are not universal constants but they are critical. Here are some possible reasons advisory firms would choose not to show real performance:
- They don’t know how
- Too expensive and time consuming
- Embarrassed by live returns
- Simulated returns are superior
- Fantasy is better than reality
- Easier to lie than tell the truth
COMMON SENSE RULES
Just because these rules are based on basic common sense, don’t assume everyone knows what they are. But they are rules that should be indelibly etched in your investor sub-consciousness, as follows:
- Given two identically engineered portfolios and execution abilities, always choose the lowest fees.
- No two advisers will have the exact same engineering and execution capabilities.Therefore, fees are important but should never be the primary decision-making variable.
- Engineering and execution will be the primary determinants of investor performance.
- Firms that have properly engineered and executed portfolios should have actual investing results to display to their prospects and clients.
- Investment returns should comply with Global Investment Performance Standards and be reviewed by a third party for verification.
- It is irrational and imprudent for investors to entrust assets to investment advisers who are either incapable or unwilling to provide this much needed information to investors.
- One of the most powerful questions any investor can ask is simply: What are your actual returns for real investors? Never invest your money with anyone who does not have verified returns.
The importance of proper engineering can’t be over-stressed. When you drive over the Robert Moses Bridge you don’t think for a moment that the bridge might collapse and you’ll end up in the Great South Bay. That’s because you trust that the engineers who built the structure in 1951 knew what they were doing, that they had the expertise and training to keep you safe. And that’s no different from having to trust that the right Investor Coach will help you discover a portfolio that is engineered to provide the best possible return for the level of risk you’re willing to take, with the intended goal of bridging the gap between your investments and your American Dream.
Higbie Advisory, LLC is a Registered Investment Advisor in the State of NY.
Robert Stabile owns Higbie Advisory, LLC a Registered Investment Advisory located in Melville, Long Island. He has over 30 years’ experience in personal risk management and has spent the last eight years as an investor coach dedicated to helping clients understand their true purpose for money, understand what Wall Street costs them and delivering Nobel Prize Investment. Strategies that meet the Prudent Man’s Rule of Investing. Higbie Advisory, LLC is partnered with Matson Money, an ERISA 3(38) fiduciary. Robert Stabile’s articles have appeared in such well-respected publications as “Small Business Today Magazine,” “Long Island Business News,” Providence Business News, and others. He can be reached at firstname.lastname@example.org. Robert Stabile’s new book “Investing – Without The Bull!” will be coming out in April 2020.