Chances are, you don’t invest for the sheer satisfaction of outperforming a market average. You’ve got bigger fish to fry — there’s retirement to fund, college tuition to pay, maybe a second home on your vision board.
Arriving at these destinations requires your money to work for you because, the fact is, few people have the means to set aside enough cash to cover the cost of their dreams. But how exactly should you put your money to work? Do you choose a market benchmark that may (or may not) align with your goals? Or do you choose an investment with a defined objective, and without the constraints of a benchmark in seeking to achieve it?
The choice is a simple one for Dennis Stattman, portfolio manager of the BlackRock Global Allocation Fund, which has been managed with an outcome-oriented bent since it was introduced in 1989. The Blog spoke with Dennis about his view on outcome-oriented investing and why the current environment is particularly conducive to it. Dennis offered these thoughts:
Risk and Reward: A Constant Negotiation
Investing is a negotiation: There’s always a balance to be struck between risk and reward. As investors, whether a professional like myself or an individual building a portfolio, we’re constantly making choices about how many units of risk we’re willing to assume in exchange for the potential to achieve x units of return. Benchmarks don’t have this mechanism. They are meant to provide a yardstick to help investors measure a particular market — the good, the bad and the ugly.
The investor, of course, doesn’t necessarily need to be content with what the market has to offer at a given time. For us, and for those who invest with us, the goal is bigger than that. We’re focused on growing assets with as little risk per unit of reward as possible. More precisely, we’re seeking equity-like returns without equity-like volatility. We want to avoid risking a lot for the potential to make a little; but at the same time, we’re open to risking a little for the potential to make a lot.
This isn’t always an easy negotiation, but across time, it has potential to reap rewards. It may mean your portfolio underperforms the broader market in short bursts but has the potential to outperform over time.
Complacency Is a Risk
In the current environment, one risk that we believe is being underestimated is the risk of investor complacency. Equity market volatility has been very low for a very long time. Investors, to some extent, have taken comfort in that — but in our belief, it’s a false comfort. It indicates that the market is not pricing in the potential threats that exist. And there are plenty, what with the tensions in Russia and Ukraine, violence in the Middle East and U.S. involvement in Syria, to name just a few.