How We Monitor Performance and Risk

As I write this, the Federal Reserve Open Market Committee (the Fed) has just dropped the “Fed Funds” target rate to 4.75%. Without a doubt, dropping the Fed Funds rate is a positive event for stocks in the U.S. and worldwide. Further, the Fed’s rate cut should benefit a real estate market that is in a nationwide recession (if not depression.) The S&P 500 finished the day up 43.13 or 2.9%. Ok, so what is next? And, what would have happened had the Fed only cut the rate by one-quarter of one percent – or not cut the rate at all? How would that have affected our accounts?

All of our (and your) accounts are managed in-house by CB3 staff. We do not out-source your assets to another money management company. The buck stops with us, so to speak. We are here to answer questions about your asset management. This, among many other benefits, is what you are paying us to do for you. The single-most question we field is: What is CB3’s approach to managing your accounts?

While that is question that requires a lengthy answer, here is the abbreviated version. Now, please hang with me on this! There’s a lot of industry language involved. Remember, this is an abbreviated response to several clients who have asked how we do what we do. These terms all mean something, they are all important, but they are not really self explanatory in and of themselves.

For our growth accounts, we are looking for the highest-return, lowest beta, lowest standard deviation, lowest R-Squared, highest Sharpe Ratio, and highest alpha exchanged-traded (only) assets available to us in our research. For our income accounts, we are looking for the highest -yielding, lowest beta, lowest standard deviation, highest R-Squared, highest Sharpe Ratio, and highest alpha exchanged-traded (only) assets. Whew, that was a mouthful! Please note that past performance does not necessarily correlate to future performance. I’m sure you know that. I will explain more of these methodologies in upcoming articles of Towards Prosperity. For now, suffice to say that, in addition to performance, we are also paying close attention to risk.

Since the market volatility of this past summer reacquainted us investors with the “feelings” of risk which we remember from the period from 2000-2002, I want address how CB3 manages risk. One of the ways is by diversification of assets. Take a look at how this works this actual client account in our Aggressive Appreciation program. The performance you see in net of all management fees and clearing costs.

This shows an actual customer’s account balance (blue line) compared to the performance of the S&P 500 (orange line) and also compared to the Consumer Price Index (CPI) from January 1st, 2007. We have many goals in managing your accounts, but two of them are: 1) to beat the S&P 500 every year by 1.5% and 2) to beat CPI by 4%. We track this on a quarterly basis. Using our risk management techniques, you can see from the above chart that we are ahead of the S&P 500 and CPI. Yes, our accounts were negatively affected in the JULY-AUGUST 10% (+/- ) pullback in the overall market. From the graph, you can see that we were negatively affected less than the overall market.

Smaller accounts in this program gave similar performance year to date with the same levels of risk management. See the below example.

Again, I’ll be describing more of our account management strategies in upcoming issues. Please feel free to write with any questions or comments. cbrown [at] weg1 [dot] com

Until next time, our very best to you and your family,