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Technology and Innovation Reduce Client Risk

October 2014
Michael Thomson, Sr.

Michael Thomson, Sr.

Historically, risk management has been an afterthought for many investors. For decades, investors have believed that pure buy and hold investing within a well-diversified portfolio provides adequate risk management. For most, investing has always been about achieving maximum returns with little or no consideration to the amount of risk they are taking to achieve those returns.

Most investors today do not truly understand the level of risk that exists within their investment portfolios and consequently accept high levels of volatility as a requirement of successful long-term investing. Investors have been told that markets are efficient, always reflecting price equilibrium, yet we continue to see significant market crashes and dislocations occur with worrying frequency. The uncertain and ever-changing global capital markets of today require an active approach to risk management.

Donohue • Hart • Thomson Financial Group places great importance on managing the risk of investor portfolios through an active investment process and by offering innovative hedging solutions designed to protect investors’ wealth. Through our innovative asset management platform, Freedom Capital Management Strategies®, we utilize a combination of diversification, tactical management and uncorrelated investments in an effort to reduce volatility and provide improved risk-adjusted returns for investors. Additionally, we offer two proprietary risk mitigation and hedging strategies – Risk Assist and Principal Guard – that overlay investor portfolios to provide an additional layer of wealth protection.

The objective of Risk Assist is to decrease volatility and reduce losses in difficult market environments by decreasing exposure to a portfolio of growth assets, typically equities, and reallocating these assets to a portfolio of low risk U.S. Treasury mutual funds or exchange traded funds (ETFs). Risk Assist seeks to accomplish this objective by analyzing a portfolio of growth assets and applying a proprietary volatility forecasting model to determine if an allocation to U.S. Treasury mutual funds or ETFs is necessary to reduce the risk of the investment portfolio given current market conditions.

The objective of Principal Guard is to return, at a minimum, an investor’s initial principal investment, less any fees and withdrawals at the end of a seven-year period1,2. Similar to Risk Assist, Principal Guard uses a proprietary algorithm that dynamically allocates between a portfolio of growth assets and a portfolio of low risk U.S. Treasury securities. Based on the risk assessment of this algorithm, Principal Guard determines trigger levels that generate signals to allocate a portion of an investor’s growth portfolio to a portfolio of U.S. Treasury securities. The Principal Guard algorithm will also generate signals to reallocate assets from the portfolio of U.S. Treasury securities back into the growth portfolio should risk levels normalize and the account value recovers.

Risk Assist and Principal Guard are designed for investors who seek to participate in the upside of equity markets but who also desire downside protection in difficult markets. I95