Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

1st Quarter | 2022

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

Bring on the future

By Peter Mauthe

A few years ago, two things made me think about what Flexible Plan does from a different perspective.

The first was an ad I saw for a car company that stated the design and build of their latest models were the result of all the car company had learned. My initial response was, “Of course! Their customers expect no less.”

The second came from a longtime friend who commented that my survival all of these years in the markets must have depended on understanding probabilities and possibilities—which, of course, is very true. And, through the years, measuring probabilities and understanding possibilities has gotten easier and more accurate as data has become available and the technology to analyze that data has improved.

As I thought about these events later, I started to think about how Flexible Plan continually monitors and modifies the rule sets in our many strategies. We do this because the market is a perpetual teacher and we are perpetual students who take all that we learn and use it to build our most recent and best rule sets. Of course we do! Our clients expect no less.

This is who we are and how we strive to bring value to our clients—by using our expanding knowledge to help them prepare for what lies ahead. Here’s a glimpse into how we do that.

Preparing for the future with data and technology

To manage change and prepare for the future, Flexible Plan goes through a continuous cycle of processing new and better data, forming and testing theories based on new and better knowledge and technology, and delivering new and better solutions.

What we do is not unique to our industry. Many industries deal with things that significantly affect our lives but are always changing.

For example, weather forecasters do this. And over the years, the availability of data and the computer power needed to analyze that data have resulted in more reliable and timely forecasts. The insurance industry also uses data and computers—in their case, to model probabilities and possibilities of loss.

Flexible Plan, like those other industries, is using the growing amount of data available and increasing computer capabilities to build on our knowledge and understanding. As we do so, we improve our ability—and our clients’ ability—to prepare for and respond to future events.

Getting insight from the web of economic forces

To understand what the future may present in terms of opportunity and risk, we need to start with the past. For today’s discussion, I will focus primarily on the stock market—even though this discussion is equally true for bonds and alternative investments.

The past is filled with a growing array of economic conditions that have driven markets. Several of the most important are the following:

- Gross domestic product (GDP)

- Inflation

- The value of the U.S. dollar

- Interest rates

These economic conditions influence each other and investment markets such as the stock market. None of these conditions can change meaningfully without causing a change in the others. The following graphic illustrates the web of influence among these economic forces.

If we think back on the past, it includes periods with low inflation and high inflation. We have had periods with interest rates so low that mortgage rates were less than 4% and periods where average mortgage rates were above 16% for more than a year. In fact, there was a month where the average mortgage issued carried an 18.45% interest rate! We have seen both significant GDP growth and contraction. We have seen tax increases and decreases, wars come and go, and unemployment near 10% and below 4%.

Through all of that, investment markets cycled through their respective bull and bear markets, providing investors with opportunities for gains and losses. An investor’s experience with gains and losses was (and is) largely attributable to the activity each one engaged in to participate in the gains and avoid the losses.

At Flexible Plan, investment activity is directed by the rules that guide the investment activities of each of our strategies. The way markets move is the result of human behavior anticipating and/or responding to the economic forces that drive the prices of stocks, bonds, and alternatives.

By looking at many economic cycles worth of data, we can build rule sets based on the probability of various outcomes. Those rules then dictate what holdings to buy and sell within each strategy—and when.

With these rule sets, we can then test strategies and portfolios back through time. Through that testing, we gain a fairly detailed understanding of strategies and portfolios, including their capabilities to take advantage of opportunities in the market and manage risk. Through that understanding, we look into the future to see what may lie ahead for investors, knowing that the future may be different from the past. Or will it?

The future will certainly be driven by new technologies, new politicians, and new business leaders. But those new things will still be accompanied by old economic conditions such as rising or falling GDP, rising or falling inflation, rising or falling interest rates, and a rising or falling U.S. dollar. We have seen all of these conditions. We’ve measured and tested them. Therefore, we know and understand the associated behaviors of strategies and portfolios.

Gaining knowledge with better tools

Not too long ago, Flexible Plan’s president, Jerry Wagner, decided to take all that we know from our experience and testing and quantify it into a forward-looking tool that would score the ability of our strategies and portfolios to successfully manage the wide array of possible economic and market conditions we will see in the future. This tool is our Crash Test Analyzer (you must be a financial adviser logged into our website to access the tool).

The rating that results from “crash testing” a portfolio or strategy is known as the Durability Score. The closer the score is to 30 (the number of conditions the tool tests against), the more likely a strategy or portfolio is to profitably manage through those conditions—no matter what the cause or origin.

This score is not only unique, but the knowledge of the score is powerful in the hands of an investor.

Facing the future with Flexible Plan

Events will change, people will change, and the climate will change, but it is the same old measurable economic and market conditions that drive the opportunities we seek and the risks we manage.

To conclude my long chain of thoughts today, we at Flexible Plan understand the probabilities and possibilities associated with economic and market cycles. That understanding grows wider and deeper each day. It is that understanding that allows us to create strategically diversified portfolios that are designed to benefit from the many opportunities and withstand the many challenges presented over time.

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