What is your current advisor's investment theory?
All financial advisors follow a theory about investments when they provide investment advice and services to their clients. Even if they don't have an explicit theory, investment advice is provided within the context of a particular view on how the global economy works.
Since the outbreak of the financial crisis a robust debate has been taking place concerning the validity of the current dominant investment theory, Modern Portfolio Theory, and its underlying core concept "asset allocation". There has also been a heated debate about the wisdom of the dominant capitalist economic theories, the so-called Efficient Market Hypothesis and the "free markets" paradigm. As the financial crisis unfolded advisors following the prescriptions of these theories failed to provide adequate protection of investment portfolios. Moreover, over the past decade investment advice built on these theories has not been very successful!
It is critical that investors know what the prevailing world view of their advisors is. It is this view, perspective or theory about how economies work that forms the foundation of an advisor's investment advice. With this in mind we decided to post a link to Riaan Nel's introductory chapter of his graduate thesis explaining the financial crisis. The theoretical perspective used is called the Financial Instability Theory, and this theory forms the foundation of all investment advice provided by Detlefsen Nel & Associates.
There is obviously no guarantee that the strategies we recommend will be successful in the future – the future remains an uncertain entity. However, it is imperative to at least have the discussion about what underlying assumptions frame different investment approaches.
In summary, the Financial Instability Theory states that the current variant of capitalism produces ever increasing fragility during the boom years, culminating in severe crashes and recessions. The theory also states that the way an economy's debt is structured is critical to the stability of the economy. Furthermore, once a new boom starts, the subsequent crash ought to be more severe than the previous one. IF the way institutions and people utilize credit in the economy is not significantly altered this cycle will continue.
It is important to note that this perspective predicted the developments over the last decade with the dot com implosion and the more recent financial crisis. If you follow the logic of this perspective then traditional approaches to investing will not provide adequate protection for your investments. Portfolios have to be constructed, and investment vehicles have to be selected, that account for the boom and bust cycles of modern capitalism.
Email Riaan Nel at riaan.nel@lpl.com if you want to learn more about our investment philosophy. If you want to schedule a no-cost, no-obligation appointment with one of our advisors to discuss our unique asset protection strategies, email Jeff Savage at jeff.savage@lpl.com, or call us at 877-349-0774 (541-349-0774).
Click on the following to access Chapter One of "The 2008 Global Financial Crisis – A Political Economic Analysis." The opinions voiced in this material are for general information only. All performance referenced is historical and is no guarantee of future results.
