Strategy
Is Multi-Strategy useful to me?
This graph is the final result of the conversation between Tina and Albert that you can find below, which serves to understand it and put it in context.
- Hello Albert. I have some doubts about my financial investments. Can I ask you a few questions?
- Go ahead, Tina!
- When I retired as a professional football player, I started a home renovation company. And for my savings, my private banker, Mario, designed an investment portfolio for me.
- Hmm…
- … but I’m not very happy with the results: Mario suggested that I invest 70% of my assets in fixed income and 30% in equities. He told me that I would be more “protected” that way.
- Hmm…
- Before 2022, my portfolio did not earn much, although I saw in the news that the markets rose strongly. Mario justified it by saying that fixed income generally earns less than shares, in exchange for “protecting” me against future crises. But in recent months, fixed income has lost more than equities!
- It’s true…
- … I don’t like fixed income! You don’t win when you have to win, and you lose when you shouldn’t! And that’s why I wanted to talk to you, to understand why I can’t just invest in stocks… that way I’d earn a lot more! … right?
- Good arguments! Do you want to know why private bankers like Mario recommend investing in fixed income to their clients?
- Yes, of course.
- The number one rule of investing is the following: “Buy low and sell high”.
- I understand. It’s like with the refurbishment of apartments: I buy them at a good price, but they need renovation and, after rehabilitating them, I sell them more expensive.
- Exactly! The hard part is doing it in practice: one study showed that while stocks earn 7.5% on average, the average investor only earns 2.9% on them.
- I am paying high costs to Mario, could this be it?
- Well no! High costs are the second reason why investors earn less than they should. But first and foremost, they “sell low and buy high”: another study showed that the investors who earned the most were those who had lost their investment account password.
- Hmm…
- When we let our emotions control us, we “sell low”, because when we lose money we are afraid of losing even more, and we “buy high”, because when assets go up in price a lot, we think they will continue to rise.
- In 2008, friends of mine bought apartments at an expensive price because they thought they would keep going up. But when the Spanish real estate crisis came, they went bankrupt.
- Exactly! And some friends of mine bought apartments in 2012, when they were cheap, and they made a lot of money.
- Very good, but what does this have to do with fixed income?
- A lot! Look at the following graph:
- I don’t understand anything, can you explain it to me?
- In this graph, you can see the evolution of investing in stocks (red line) and a portfolio with 30% stocks and 70% debt, similar to the one Mario recommended to you (grey line).
- I understand.
- See what happened to stocks (red line) during the subprime crisis…
- They fell by 50%.
- Exactly! By contrast, a 30/70 portfolio fell just 11%.
- This explains why Mario recommends me to invest in fixed income.
- You got it perfectly!
- But look what has happened in recent months, with the inflation crisis: the 30/70 portfolio has fallen even a little more than stocks! I don’t like this investment at all.
- You are right! And to avoid this, look at the third line, the blue one.
- Oh yeah. The blue line fell little during the inflation crisis. And it also did relatively well during the COVID-19 crisis, and in the subprime crisis. What is this investment?
- The blue line represents the Empodering Multi-Strategy strategy. Multi-Strategy is a strategy that attempts to reduce the risks of a moderately risky portfolio, such as your 30/70 portfolio.
- Well, it does it pretty well, right? It has lower losses during big crises than my portfolio, but the final return is higher.
- Exactly! You end up earning less than stocks, but stocks can lose a hell of a lot more. The extra risk is not worth taking.
- But what if I accept this extra risk?
- Remember the number one rule of investing: “sell high and buy low”. If you invest with a lot of risk, it is likely that in a big crisis you will end up “selling cheap”. Think about it: if from one day to the next, your savings were worth half, how would you feel?
- Well, the truth is that it would not be pleasant at all. It is possible that I decided to sell everything, for fear of losing even more.
- Exactly! This very human reaction is what most people have when they find themselves in these circumstances.
- And the number one objective of every investor is to buy low and sell high and, therefore, it is better to avoid finding yourself in these circumstances, right?
- You got it perfectly!
- Interesting… in theory. But in practice how is it done?
- For that, you will have to contact Empodering and see how they can help you. Good luck!
How much will I earn with Multi-Strategy?
This graph is the final result of the conversation between Tina and Albert that you can find below, which serves to understand it and put it in context.
- Hello Albert. The other day you helped me understand why the Empodering Multi-Strategy can be useful for me. But do you have a moment for a question?
- Go ahead, Tina!
- How much will I earn with this strategy? If an unexpected crisis comes, how much can I lose?
- Good questions! It’s always good to look at all the possibilities, both the expected results and the possible extreme risks.
- Yes. My grandfather lost his savings with the Spanish preferred stocks scandal, and I am always concerned about unknown risks.
- Sounds like a good attitude to me. To answer your question, you must tell me what your time horizon is: will you need the money at some point in the future?
- Well, I don’t know. I save for the future, but I don’t have a specific date in mind. I don’t think I’ll need to tap into my savings anytime soon… but who knows!
- Perfect! When you renovate a flat you just bought, how much will you earn with this investment? Can you lose it all if things go wrong?
- You are returning the question back to me.
- It’s the idea!
- The answer is that I don’t know. If the real estate market continues as it is now, I know roughly what I’m going to earn. But if a crisis erupts suddenly, I can lose money.
- Exactly! Well, the same with financial investments.
- I’m sure you’re right. But your answer is not very helpful.
- Okay! Let’s try to put numbers. Let’s get back to your real estate investments. Maybe you think you can earn, if all goes well, 7% in a year.
- Yes, this is reasonable.
- But it won’t always be like that. Let’s say that once every seven years, a crisis comes along and you lose 10% that year.
- Seems reasonable to me too.
- So the answer to your question, about how much you will earn on your investment, depends on what year you start!
- You’re not being very helpful…
- …In ten years, you will have had a rough year or two, but the rest will make up for it, and you will have earned about 6% a year.
- This is better now. But you keep talking in theory: in practice, how much will I earn if I invest with the Empodering Multi-Strategy?
- The answer is that, in the long run, you will earn 4.5% per year.
- This is the equivalent of 6% per year from your example above, right?
- Exactly!
- In other words, there will be years in which I will earn more than 4.5%, and others in which I will earn less. But in the long run, one thing outweighs the other, and I’ll earn 4.5% on average if I keep the investment long enough, right?
- You got it perfectly!
- And if I am unlucky enough to start in a “bad” year and lose money, how long can it take to get it back?
- Good question, Tina! The answer is four years.
- This four-year thing, is it guaranteed?
- Nope! It is a probabilistic calculation. It can be a bit more, or a bit less.
- And if I keep my initial investment for several years, how much can I earn?
- If you invest for 25 years in the strategy, you will most likely triple your initial investment.
- Seems reasonable. What if things don’t go so well?
- In a pessimistic scenario you would double your initial investment, after 25 years.
- What if we are lucky, and the markets play in our favor?
- In an optimistic scenario you would multiply your initial investment by four, after 25 years.
- Well that’s fine.
- But keep in mind that these calculations are based on past data, and you have surely heard that “past results do not guarantee future results”.
- I think I now have a better understanding of what to expect from this strategy. Nothing can be guaranteed, but the longer I keep the investment, the more likely it is that the results you mention will come true, right?
- Exactly, you have understood everything very well, Tina! I now show you a graph that summarizes our conversation, and with which you can “play” a little:
- Ah, it’s fun, I like to move the mouse over the screen, and see how much I can earn at any time.
- And with the buttons at the top of the chart, you can change the initial investment.
- Thank you very much, Albert, you have answered my questions well. See you soon!
- See you soon, Tina, and good luck!
¿What is the investment fund Empodering Multi-Strategy?
- Hello Albert. I have doubts about my financial investments. Can I ask you a few questions?
- Go ahead, Tina!
- I have received an email from Empodering with my Personalized Investment Plan, after I have filled out their questionnaire, about my investor profile.
- Mmm…
- And my Personalized Investment Plan recommends that I invest in the investment fund Empodering Multi-Strategy.
- I also received a similar recommendation when I signed up for Empodering.
- There are things I don’t understand. For example, Mario recommended a portfolio to me that has fourteen mutual funds. However, with Empodering I would invest in a single fund. Isn’t it worse to invest in one fund than in fourteen?
- Good question! The Empodering Multi-Strategy fund is, in effect, an investment portfolio, containing the equivalent of Mario’s fourteen mutual funds, but with the Multi-Strategy.
- Ah, this makes more sense. But why put a portfolio inside an investment fund? Isn’t that an unnecessary complication?
- Looks like it, right? Well no! For a retail investor, even with a lot of money, it might be difficult or outright impossible to invest in the Multi-Strategy strategy without the fund.
- Why?
- Because several of the assets in the strategy are intended for large institutional investors.
- And an investment fund is a large institutional investor, right?
- You got it perfectly!
- Okay. Are there other reasons to use a single mutual fund, instead of a portfolio with fourteen?
- Yes! Rebalancing, for example, can be done directly by the manager, without the investor having to do anything.
- Ah, yes, I’ve never understood this rebalancing thing very well, but Mario recommends me to do it every few months, and it’s work.
- Instead, with a single investment fund, all this is automatic. In fact, I think that investing in this investment fund makes things a lot easier for me.
- Why? This interests me: I have many things to do in my life, and I have no time to waste with my investments.
- Since I only invest in a single mutual fund, I understand better my profits and losses.
- It is interesting that you say this, because with Mario, something similar happens to me. I know how much the portfolio is worth at all times. But since there are fourteen funds, I’m never quite sure why I’m winning or losing.
- Yes, with a single investment fund, everything is easier.
- So far, everything you’ve told me is positive. But won’t it be more expensive?
- Yes, it is necessary to pay the administration of the investment fund. But there are also savings: a fund is a large institutional investor, and can negotiate prices better than a retailer.
- In other words: the Multi-Strategy investment fund allows me to invest in a way that I couldn’t before, it makes my life easier, and it doesn’t increase my costs compared to my current set up, is that so?
- You got it perfectly, Tina! I came to the same conclusion.
- Thank you, Albert. You have answered my questions well. See you soon.
- See you soon, Tina, and good luck!
Is Multi-Strategy useful to me? (advanced)
- Hello Albert. I have some doubts about my financial investments. Can I ask you a few questions?
- Go ahead, Tina!
- When I retired as a professional football player, I started a home renovation company. And for my savings, my private banker, Mario, designed an investment portfolio for me.
- Hmm…
- … but I’m not very happy with the results: Mario suggested that I invest 70% of my assets in fixed income and 30% in equities. He told me that I would be more “protected” that way.
- Hmm…
- Before 2022, my portfolio did not earn much, although I saw in the news that the markets rose strongly. Mario justified it by saying that fixed income generally earns less than shares, in exchange for “protecting” me against future crises. But in recent months, fixed income has lost more than equities!
- It’s true…
- … I don’t like fixed income! You don’t win when you have to win, and you lose when you shouldn’t! And that’s why I wanted to talk to you, to understand why I can’t just invest in stocks… that way I’d earn a lot more! … right?
- Good arguments! Do you want to know why private bankers like Mario recommend investing in fixed income to their clients?
- Yes, of course.
- The number one rule of investing is the following: “Buy low and sell high”.
- I understand. It’s like with the refurbishment of apartments: I buy them at a good price, but they need renovation and, after rehabilitating them, I sell them more expensive.
- Exactly! The hard part is doing it in practice: one study showed that while stocks earn 7.5% on average, the average investor only earns 2.9% on them.
- I am paying high costs to Mario, could this be it?
- Well no! High costs are the second reason why investors earn less than they should. But first and foremost, they “sell low and buy high”: another study showed that the investors who earned the most were those who had lost their investment account password.
- Hmm…
- When we let our emotions control us, we “sell low”, because when we lose money we are afraid of losing even more, and we “buy high”, because when assets go up in price a lot, we think they will continue to rise.
- In 2008, friends of mine bought apartments at an expensive price because they thought they would keep going up. But when the Spanish real estate crisis came, they went bankrupt.
- Exactly! And some friends of mine bought apartments in 2012, when they were cheap, and they made a lot of money.
- Very good, but what does this have to do with fixed income?
- A lot! Look at the following graph:
- That’s what it said. Stocks earn more than my portfolio. And the reason is fixed income.
- Not so fast. Now look at this other graph:
- During the subprime crisis, stocks lost 50%, but a portfolio like yours only fell 11%.
- Hmm…
- If the value of your portfolio fell by 50% tomorrow, would you be calm?
- Not really.
- Most people don’t either. This is why the average investor gains little: when stocks fall, they “sell cheap” because they fear losing more. And when stocks rise again, they wait too long to buy and therefore “buy high.”
- Hmm…
- If your portfolio falls by 11%, you are less likely to “sell cheap” than if it falls by 50%.
- I agree.
- Therefore, it is useful for a portfolio to have hedges that reduce losses.
- I think I’m beginning to understand you… but this is all theory. In practice, the fixed income in my portfolio has lost more than equities in the first months of 2022!
- You’re right: fixed income hasn’t been doing well in recent months. But without hedges, your portfolio would be very risky and, in the end, you would end up “selling low and buying high”.
- What you say makes sense. But if hedging my portfolio hasn’t worked, and if without hedging it would be too risky, what do I do?
- There may be other assets which can become hedges.
- And what are they?
- Look at this graph, which includes the evolution of the price of gold, as well as that of a portfolio similar to yours (which we will call 30/70, because it has 30% of shares and 70% debt), and tell me what you think:
- Well, gold doesn’t seem to protect me much: first it rises, and then it falls hard. Would gold really reduce the risks in my portfolio?
- You, who are a footballer, know that the value of a player cannot be measured in isolation, but by how she improves the game of the team as a whole.
- And what does football have to do with hedging?
- More than meets the eye: Look!
- When you add gold to a 30/70 portfolio, it gains more and loses less. We call it the 30/55/15 portfolio (30% stocks, 55% debt, and 15% gold).
- Got it. What other hedges do we add to further reduce the risk?
- Check out this other asset, the “trend-following funds”:
- Hmm…
- In recent months they have risen quite a bit, when fixed income fell. And they also worked well as a hedge in a long and deep crisis like the subprime one.
- Hmm…
- If you had invested in this asset since the beginning of 2022, your portfolio would have lost less:
- Interesting…but these trend-following funds didn’t do very well during the COVID-19 crisis, did they?
- Good observation! And for that very reason, we also need risk insurance funds:
- “Risk insurance funds” work in a complementary way to “trend-following funds”: while the latter do well during long crises, the former earn a lot at the beginning of them.
- Hmm…
- And this is the Empodering Multi-Strategy: a portfolio made up of stocks, fixed income, gold, “trend-following funds”, “risk insurance funds” and similar strategies:
- But you still haven’t answered my initial question: why can’t I invest my assets entirely in stocks?
- You are right! Look at this last graph:
- Stocks have earned more, in the last 17 years, than the Multi-Strategy strategy. But they suffered bigger drops during the subprime crisis, COVID-19 and the high inflation of the first half of 2022. Therefore, with the Multi-Strategy strategy you are less likely to end up “selling cheap” than with stocks. And avoiding “selling cheap” is the number one rule of investing.
- Interesting… in theory. But in practice how is it done?
- For that, you will have to contact Empodering and see how they can help you. Good luck!