Market insights and analysis

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

3rd Quarter | 2023

Quarterly recap



Current market environment performance of dynamic, risk-managed investment solutions.

By Jerry Wagner

Over the years I have written about “Plan B Investing” and “Just-In-Case Investing.” Both of these are similar but different.

Plan B Investing

Plan B Investing means having an alternative mode of investing when plan A fails. For example, if you use index investing within a passive asset-allocation process, what do you do when that begins to fail? Do you have a plan B? At Flexible Plan, our dynamic, risk-managed approach is often the plan B that investors turn to when buy-and-hold investing falters. It is built into all of our strategies, which are available on most investment platforms, as well as many variable annuity and retirement plan providers.

Just-In-Case Investing

Just-In-Case Investing is a similar concept in that it also implies the use of multiple approaches. The difference is while Plan B Investing is applied, either automatically within our strategies or by investors after their present investment methodology begins to or has failed, Just-In-Case Investing refers to employing two different methodologies at the same time within a single portfolio.

With Just-In-Case Investing, each methodology is used all of the time. Each is there “just in case” the other fails. For this reason, our dynamic, risk-managed core strategies are often paired in a portfolio with passive cores that apply conventional asset allocation. When there is little volatility or the market is rallying, 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.

Both approaches do best the earlier they are put into practice ahead of a market-disrupting event. They both assume that risk is always with us as investors and that its appearance is often unpredictable.

There are two other types of risk-managed investing that I’ll throw out there in this compare-and-contrast summary. In the volatile market that we’ve lived in recently, I think they are worth touching on.

Fail-Safe Investing

Fail-Safe Investing is a concept popularized by writer, politician, and investment adviser Harry Browne. In a book of the same name, Browne outlined the need to be an investor and not a speculator.

He said investing is simple. You just find the least-correlated asset classes (they move in different directions) and buy an equal amount of risk of each. This becomes your “permanent portfolio” as the allocation between the assets remains the same over time. Since the assets move differently in different markets, something will always be rallying. The strategy would be “fail-safe” as it could never completely fail (unless the assets chosen did not remain uncorrelated).

At Flexible Plan, our All-Terrain strategies employ this approach. They principally use gold, stocks, and bonds to invest in, as historically they have been the least-correlated major asset classes.

We did go Browne one better in creating our All-Terrain strategies. His “permanent portfolio” was a one-size-fits-all approach. At Flexible Plan, we created five All-Terrain strategies, each representing a different level of risk and thus suitability for various types of investors. Static and dynamically managed versions are available for conservative, moderate, balanced, growth, and aggressive investors.

Investing with Redundancy (IWR)

The final risk-management technique I want to discuss is Investing with Redundancy (IWR). Redundancy is one of the most frequently used concepts when trying to manage the risk of a process. It is used in two different manners: passive and active.

After Apollo 13 had its electrical system problem and the three astronauts had to skip the moon landing and limp back to earth, NASA’s recommended changes after the mission were for more backup equipment and processes. This is an example of employing passive redundancy. Even without these changes, 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 all of the 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.

The Wikipedia entry for “Redundancy” explains, “A structure without redundancy is called fracture-critical, meaning that a single broken component can cause the collapse of the entire structure. Bridges that failed due to lack of redundancy include the Silver Bridge and the Interstate 5 bridge over the Skagit River.”

How Flexible Plan applies IWR

For that reason, here at Flexible Plan, we are constantly seeking new ways to employ redundancy in our investing processes. Many are passive. For example, because our quantitative investing process is totally number dependent, we use multiple sources for the data used in our algorithms. We do this so that if one source is down or inconsistent, we can still trade our strategies. Similarly, since a major source of error can be 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 have multiple systems built into them to determine when to scale risk up or down and for choosing which systems to employ.

Our Quantified Fee Credit (QFC) strategies are all based on the Investing with Redundancy approach. Not only are they a low-cost version of many of our most popular strategies, but they 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.

As we have said many times throughout our almost 40-year history, there are many ways to manage risk beyond a diversified, passive asset-allocation approach. That’s just one method, just as “buy and hold” is just one strategy.

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