Market insights and analysis

By Jerry Wagner

Managing risk is a crucial element of successful investing, yet many investors rely solely on traditional strategies such as buy-and-hold or passive asset allocation. However, these conventional methods may not always be enough, especially during periods of market disruption or volatility. Today, I’ll walk through four unconventional approaches to managing risk—plan B investing, just-in-case investing, fail-safe investing, and investing with redundancy—that can offer alternative ways to protect portfolios in unpredictable markets.

Plan B investing

Plan B investing involves having an alternative mode of investing in place when your primary investment method (plan A) fails. For example, if you’re using index investing as part of a passive asset allocation strategy, what happens when that no longer works? Do you have a backup plan? At Flexible Plan Investments (FPI), our dynamic, risk-managed approach often serves as the plan B investors turn to when buy-and-hold investing falters. It is built into all of our strategies, which can be accessed through most investment platforms, variable annuities, and retirement plan providers.

Just-in-case investing

“Just-in-case investing” is similar to plan B investing in that it also implies the use of multiple approaches. The difference is while plan B investing is activated after your primary strategy fails, just-in-case investing involves employing multiple methodologies simultaneously within a single portfolio. This way, if one strategy falters, the other can compensate. For this reason, our dynamic, risk-managed core strategies are often paired in a portfolio with passive cores that apply conventional asset allocation. During low volatility or rallying market environments, the latter does most of the heavy lifting. While the dynamically risk-managed portion will participate during such times, its largest burden-sharing occurs during volatility-heavy bear market declines.

Plan B investing and just-in-case investing are most effective when implemented before market disruptions occur. They operate under the assumption that risk is always present and often unpredictable.

Fail-safe investing

Fail-safe investing, popularized by investment adviser Harry Browne, emphasizes the importance of being an investor rather than a speculator. Browne said investing is simple. You just find the least-correlated asset classes and then allocate equally to each of them. This becomes your “permanent portfolio,” as the allocation among the assets remains the same over time. Since the assets move differently in different markets, something should always be rallying. The strategy should be “fail-safe” as it could never completely fail (unless the assets chosen did not remain uncorrelated).

FPI’s All-Terrain strategies follow a similar approach, primarily using gold, stocks, and bonds—historically the least-correlated major asset classes. But while Browne’s strategy offered a one-size-fits-all solution, FPI has expanded on the concept by offering five All-Terrain strategies, each tailored to different risk levels—conservative, moderate, balanced, growth, and aggressive.

Investing with redundancy (IWR)

Investing with redundancy (IWR) is a key risk-management technique that involves including multiple layers of protection within an investment strategy.

Redundancy, one of the most frequently used tools to manage risk within a process, can be employed in two different ways: passively and actively.

After Apollo 13’s electrical system problem forced the three astronauts onboard to skip the moon landing and limp back to Earth, NASA recommended changes to add more backup equipment and processes. This is an example of employing passive redundancy. If you get the chance to view an Apollo control capsule, you will be surprised by the number of redundant or backup systems.

When NASA created the space shuttle, it outdid the Apollo. Apollo had one computer with three redundancies built in. The space shuttle had five separate computers, four of which did the same calculations during critical times—takeoff, descent, etc. In addition, the builders created a process that surveyed the results of all four and voted on which to follow—a process referred to as active redundancy.

At FPI, we apply both passive and active redundancy to our investment processes. An example of passive redundancy includes using multiple sources for the data used in our algorithms. That way, if one source is down or inconsistent, we can still trade our strategies. Similarly, to avoid human error, we have multiple people both to confirm trade instructions and also to implement the trades.

At the same time, our trading strategies employ active redundancy scoring systems like the NASA space shuttle example. They are developed with multiple systems to determine when to scale risk up or down and to choose which systems to employ.

Our Quantified Fee Credit (QFC) strategies are all based on the investing with redundancy approach. Not only are they a lower-cost version of many of our most popular strategies, but they also provide two levels of risk management, which is where the investing with redundancy approach comes into play.

The QFC strategies employ our subadvised Quantified Funds to trade the strategies. Passive and active redundancy is employed within the funds. Within these funds, we use many different and—in some cases—redundant strategies to manage performance and risk. At the same time, a different level of risk management is employed in allocating among the funds to effectuate our traditional strategies.

There’s more than one way to manage risk

As we’ve seen throughout these examples, there are many ways to manage risk beyond relying solely on a diversified, passive asset-allocation approach. At FPI, we’ve long believed that this is just one method, much like buy-and-hold is just one strategy. By considering approaches like plan B investing, just-in-case investing, fail-safe investing, and investing with redundancy, investors can better navigate unpredictable markets and protect their portfolios against the unexpected.