Market insights and analysis

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

4th Quarter | 2021

Market insights and analysis


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

Is your portfolio ready for takeoff?

By Peter Mauthe

Two years ago, I wrote the following article. I thought it was appropriate to update and present it again this week because the message is still relevant in light of the recent contentious U.S. presidential election and the fast and furious “COVID crash” in 2020.


Before the pandemic, we used to invite financial advisers to visit our home office. These visits let us get to know advisers better and allowed advisers to meet the people who make good things happen behind the scenes when they engage us as a third-party money manager for their investor clients.

One of these visitors shared that he grew up with a passion for aviation and had become a pilot at an early age. This led to a discussion about the checklist pilots use to help manage the risks associated with flying. I was once told, and our guest confirmed, that pilot checklists are composed of items that would have prevented accidents in the past if they had been checked.

He went on to point out that pilot checklists don’t change often because the engineered systems used by pilots haven’t altered much over the years. Yes, they have been updated and are more sophisticated, but they are functionally similar.

Flexible Plan Investments’ rules-based, systematic approach to investing is similar to following a pilot’s checklist. Each of the rules we have developed is there because following it would have helped manage portfolio risk or capture opportunity at some point in the past.

However, unlike the rarely changing systems pilots use, financial markets continually evolve through legislative action, technology advancements, or innovation of financial products. These changes influence the way investors behave and drive markets.

The world is always changing … and so is our approach to risk

In less than 50 years, we have deregulated commissions, allowed banks and brokerage firms to be affiliated, invented the internet, and introduced electronic trading. We have also created new financial instruments in the form of options, financial futures, and exchange-traded funds. And that is the short list.

This is another area where the checklists of pilots and rules-based portfolio managers differ. The pilot’s checklist is designed to provide the status of systems that monitor the physics of flying. The portfolio manager’s checklist (or rule set) is designed to drive prudent responses to market action that is propelled not by physics, but by investors and their emotion-driven behavior.

Investors respond rationally to economic, political, and market-related news and data most of the time. Likewise, the rules portfolio managers design to respond to such rational market behavior are effective at managing portfolio risk and opportunity most of the time.

Yet, unlike the laws of physics, which remain constant, human emotion and the resulting behavior can switch from rational to irrational with little notice. When such irrational investor behavior becomes the controlling power in the markets, rational rules may struggle to respond effectively. Fortunately, irrational investor behavior has historically been short-lived. Nonetheless, it is important to understand that it is often these periods of irrational investor behavior that drive sharp corrections (drawdowns) in markets and portfolios.

Without a rational approach, investors are vulnerable to “irrational” markets

It’s easy to identify market corrections driven by irrational investor behavior. The declines are usually very sharp and very short-lived and likely to reverse just as sharply and quickly. Examples of such corrections are noted in the following graph.

These market events can happen in the stock, bond, or alternative markets. Whichever asset class the sharp decline originates in, the effects are generally felt in the other asset classes. Often one or both of the other asset classes move in the opposite direction of the asset class experiencing the sharp decline. This is among the many reasons Flexible Plan’s strategic diversification includes allocations to multiple asset classes.

Unfortunately, these short-lived events often cause investors to want to change portfolio tactics and structure. Our experience and history strongly support the approach that well-designed portfolios often quickly recover from such short-lived declines despite being set back by them.

The key to investing success is to adapt

The checklist of a rules-based portfolio manager is constantly adapting in response to these perpetually changing markets, economic globalization, and the evolution of risk-management techniques available.

At Flexible Plan, we are particularly aware of this since we have been in business for 40 years and presently actively manage more than 100 strategies. Those who want to see how rule sets have worked within strategies over time can explore the historical (model) data we maintain and make available.

We believe it is important to continually learn from the behavior of our many strategies in the ever-changing markets and use that knowledge to improve them. Technology allows us to test incremental improvements over time to make our rule sets more effective at managing risk and taking advantage of market opportunities. This is an integral part of our responsibility to our financial adviser clients and their investor clients. The results of the latest rule sets are presented as hypothetical data so they can be used in the process of selecting strategies and creating portfolios.

When Jerry Wagner started Flexible Plan in 1981, he had the option of building the company’s investment process around the subjective group decision-making of an investment committee or around a systematic, rules-based decision-making process. He unhesitatingly chose the latter because rules were more reliable, able to be tested back over time, and not subject to emotions that can adversely influence decisions at critical times.

Today, 40 years later, Flexible Plan still has no investment committee and all investment decisions remain rules-based—rooted in statistical testing that demonstrates that each rule, as applied over time, plays a role in managing risks and opportunities.


Since this article originally published in February 2019, we have experienced two major events (a contentious presidential election and the COVID pandemic) that have aggressively tested our rules-based approach to investing. Through both events, our portfolios responded as they were designed to—actively managing risks and opportunities. Also noteworthy is the fact that the vast majority of portfolios have moved into new high territory. The lesson remains the same: The markets and the economy will change for myriad reasons, but our strategically diversified and actively managed portfolios will adapt as needed to fulfill their objectives.

Comments are closed.