What makes Larsen Financial Management different?
We are not about becoming the largest financial and investment management firm in the country. That is a major focus of the vast majority of financial firms. Our only focus is on improving the delivery of services to a select number of families with the objective of improving the investment results and financial well-being of those families.
We understand that it is just as important to “preserve” wealth as it is to enhance wealth. The vast majority of our time is spent reviewing market conditions and being constantly vigilant of high-level risk conditions which could adversely affect account values. While we would certainly like to hold every investment we make for 20 years, we understand that factors affecting an individual investments’ performance can change rapidly and therefore have to be withdrawn from the portfolio. This is in stark contrast to the “Buy and Hold” philosophy, especially common among the large Wall Street firms.
Those firms traditionally subscribe to what was theorized in the 1950’s by Harry Markowitz in his Nobel Prize winning work called “Modern Portfolio Theory”. The fundamental thesis of his work, supported by mathematical calculations, was that a group of non-correlated investment types combined into an investment portfolio would reduce overall portfolio risks (volatility or standard deviation) without sacrificing an excessive amount of return. The theory was absolutely valid. So, what has changed? The answer to that is the speed at which information is accessed throughout the world.
Beginning in the mid 90’s, the internet made it possible to disseminate information virtually instantly around the globe. The result of this, I believe, is what caused the change in the dynamics of the Modern Portfolio Theory. Over a very short period of time, the correlations between various asset classes (style, country, market) became much more correlated (0.90 : 1.0 vs .050 : 1.0). The result of this was that the financial markets looked more like a school of fish or flock of Starlings, moving in uniform synchronization as if dancing to a choreographed rhythm. Thus, this increase in correlation is what has caused the “nowhere to hide” cry from the last two (2000-2002 and 2008-2009) market sell-offs and now, more recently the 2022, sell-off.
So, while we are constantly on the lookout for areas of positive return, there are periods of time when being out of most securities markets is the best strategy. This condition usually does not last for an extended period of time. Markets tend to rise slowly over time but sell-offs are usually faster and more damaging in the short run. While we can't avoid entirely a sharp sell-off, we are on guard to reduce the damage caused by such a sell off by either placing hedges on portfolio positions or by raising cash in the portfolio.