Because we are not limited to a pre-selected universe of investments and can make recommendations from most investments that exist, we narrow our investment choices by first screening out assets that have less than 10 years of trackable history. We then take a top-down investment approach to further narrow our investment options.
Top-down investing and bottom-up investing are two theories of how to choose the best assets to purchase. At Chapwood, we always begin with a top-down analysis, which looks at the selection of the type of asset in which to invest and the sector to which it belongs as well as the geographic area in which the investment is located.
Anyone who says that “picking the right stocks” and “good timing” are the keys to investing is completely wrong.
Indeed, two authoritative studies paint a completely different picture. They show that selecting the right types of investments and the correct geographic areas in which to invest are among the keys to generating high profits. Specifically, in a 1986 study, Brinson, Hood, and Beebower examined the multiyear performance of 91 major American pension funds. The researchers found that types of investments and the geographic location of assets accounted for 93.6% of the difference in the plans’ returns. On the other hand, the selection of which specific securities to buy accounted for just 4.7% of the variation of the funds’ returns, while the timing of investment purchases was only responsible for 2.1% of the differences in the funds’ profits.
Confirming the previous study’s finding, a subsequent analysis by Brinson, Singer, and Beebower, carried out in 1991, determined that the types of investments and the geographic location of assets was responsible for 91.5% of pension plans’ profits.
Once we have done the top-down analysis and selection, we then focus on bottom-up investing. Bottom-up investing emphasizes the importance of picking good, individual stocks at the correct time.
When making initial recommendations, we will make sure the proposed portfolio is diverse and non-correlated. This is to make sure you are prepared for unexpected events. To prepare for the unexpected, your portfolio should always include many different types of investments whose values do not tend to go up and down together.
A good analogy of why and how to prepare for unexpected situations comes from baseball. Let’s say that, in the first six innings of a nine-inning game, no balls have been hit to a team’s right fielder. Does that mean that the team, in the seventh inning, should no longer use a right fielder? Absolutely not. Because, in a crucial situation in the seventh inning, a left-handed hitter, who had struck out in all his previous at-bats, could unexpectedly hit a ball hard to right field. Without a right fielder, the team in the field will have big problems.
So, if you have a good portfolio that’s prepared for the unexpected, all your investments should not go up simultaneously. Actually, some of your investments should always be flat or going down. And when the macroeconomic or geopolitical situation changes unexpectedly, those investments will prevent you from losing a great deal of money.
Taking into account both the top-down and bottom-up analysis, we will construct a diverse, non-correlated portfolio proposal that matches up with your risk, return, and income requirements. We do this with our proprietary tool, The Chaptimizer.
The Chaptimizer is the most powerful portfolio-building tool in the investment community today. It can build portfolios that have historically achieved whatever your desired rate of return and risk profile are.
Implementation & Monitoring
After you approve our recommendations, we will implement the portfolio proposal.
Following the initial implementation, every quarter, at a minimum, we will meet up either virtually or in person to evaluate how we are doing relative to your initial benchmarks. We are making sure that the income needed isn’t disrupted and that the correlation of assets hasn’t changed.