Written By


Published On
September 22, 2014

There are many different ways to invest in the market and many different investment philosophies. However, decades of research provide strong evidence for one investment style in particular, the one we implement here at Pure Financial.

In spite of all the knowledge we currently have about investing in capital markets, some folks still feel the need to pursue wild strategies in an attempt to boost returns. Is this pursuit greed, is it fear, or is it the chase itself? Whatever it is, investors seem to find ways to jeopardize their retirement assets. Sadly, this problem is not contained to individual investors risking their own capital. Institutional investors are also tempted by the lure of higher returns. Why? Higher returns are more appealing to just about anyone, but the important question is how to pursue those returns. This question is especially important for retirement plans investing other people’s money.

In April, the San Diego County’s pension board approved the use of leverage in their investment strategy. In its simplest form, leverage is a strategy that uses borrowed money in an attempt to magnify returns. In the market place there are a variety of ways to lever your portfolio. One way is to use derivative products like options or future contracts to gain exposure to large market shares while only putting up a fraction of the capital. In a less complex fashion, you can simply use margin in your investment account.

It’s the same old story we have seen over and over again. San Diego County’s pension has an unfunded liability and is attempting to make up ground by employing exotic strategies. The county’s recent decision allows its investment manager to use 100% leverage in their portfolio. In other words, the 10 billion retirement fund can invest 20 billion in assets. To put this in perspective, the city’s pension allows no leverage at all.

You can almost think of this as borrowing money from one of your credit cards to place bets in Vegas. If you win you can now pay off all your credit card debts. If you happen to lose however, now you’re in a really bad place. We know that when it comes to investing, risk and return are related. The point I’m trying to make is that it’s not very prudent to try and dig yourself out of a hole by using a bigger shovel.

In a recent turn of events, it seems as though the pension board has finally received the message. On September 18 the board voted to consider firing their Houston based investment consultant, Salient Partners. The final decision on the future of the consulting firm is set for Oct 2. In the meantime, the board voted to limit Salient’s ability to use leverage in the portfolio – good idea.

Active management, alternative investments and structured products sound exciting and are enticing to human nature. Years of evidence, however, points us in a completely different direction. In the era of modern financial theory, 50+ years of research illustrates that there are systematic ways to increase returns. You don’t need complicated and opaque strategies to have a successful investment experience. Nobel Prize winning economist Paul Samuelson once said “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas” (without the credit card of course). Pure Financial’s portfolios are designed without the use of any exotic investment products, stock picking or market timing. We simply leverage the findings of the academic community, pardon the pun.

UPDATE: San Diego County’s pension board rejected a proposal to fire the consultant managing its $10.1 billion portfolio over the use of leverage to boost returns.