The Truth Is Reasonable

Mr. and Mrs. Kluge are amazed. The maximum investment loss incurred was a whopping 56 percent and the longest recovery phase to get back to the initial value took a good 13?years. Mr. Kluge shrugs his shoulders in a relaxed manner; from the very beginning, he was determined to select a portfolio management mandate with 100 percent equities for himself and his wife. Mrs. Kluge was not so sure. Potentially having to endure a setback of more than half of the portfolio value? Looking at the possible course of a stock portfolio, the family-internal discussions would have probably started now...

Why am I writing about this in Gutmann Viewpoint? As an investment expert, I was recently part of such a conversation. What exactly did the Kluges (name changed by the editors) see in the advisory meeting with us - the private bank they chose to trust? A Gutmann asset management recommendation with 100 percent equities. Within the offer,?we show, among other things, how such a portfolio has performed over the last 30 years - on the basis of stock indices. This does not include our management performance and our asset allocation decisions - conversely, how we weighted the stocks over time. The figures in the first paragraph are the statistical review over these 30 years.

Anyone who is ready to climb a mountain should know and plan, what he or she is getting into. We roll out the map on which route we will use and present crucial graphics backed with the historical figures. To stay with the analogy of the mountain, it is not just about altitude and gradient, a picture of the Matterhorn or the Eiger North Face says more than a thousand words.

With random sampling to the solution

No one knows what the future holds. Yet, that does not stop us in the Chief Investment Office from forming an opinion. We consider the possibility of uncertainty and show a possible range around our scenario. How we do that? By using the Monte Carlo method [1], we identify a myriad of paths the portfolio could take. The upward and downward extreme variants define the expected limits of the distribution. What is the surprising insight from this? After ten years of investment, there can be a minus. It is a low-end of probability, but it cannot be ruled out.

“The truth is reasonable for mankind,” Ingeborg Bachmann knew as early as 1959. Unfortunately, this wisdom is far too often forgotten in the financial industry. Moreover,?every proper businessperson wants to present his or her merchandise in as good a light as possible. However, the truth about any risks should not drive you away - as a potential customer who wants comprehensive advice.

Only by transparently presenting a wide range of scenarios do we have a chance of getting to grips with the greatest risk in this context: us humans. Despite technological innovation, human behavior has hardly changed over time. Emotions can lead to lead bad decision making and losses. Intensive discussions - as part of the Gutmann Taking Measure process - are necessary to ensure that a mountain map is matched between the customer and the bank.

Transparency is important (to us)

For example, a potential customer has sold a property for one million euros and now wants to invest this money. He or she is about to retire and the sum, or the return generated, should make an important contribution to their living costs. From the actual conversation, it became clear that only with a high share of stocks could the sum be preserved in real terms and at the same time, the desired performance be generated. There was only one problem: shares can fall sharply and thus torpedo the planned goal.

Intensive discussions within this area of tension were necessary. In the end, one sentence from the interested party was particularly important: “If I choose 80 percent equities, I may not be able to withstand the setback. On the other hand, if I use up a large part of the million, at least I will have had something out of it.” This made it clear: The equity quota would have to be set much lower.

As broad as your goals, requirements and personal needs are, together we will find the best solution to reach the peak of the mountain safely.

?[1] A Monte Carlo simulation has nothing to do with casinos; it is a method of probability calculation. Read more here.

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