Investment Risk Management with Dan Irvine

Come on

blood blood. This is George G. And the time is right. welcome today’s guest strong a powerful Dan Irvine Damn, are you ready to do this? I’m ready, George, let’s go. Let’s go. Dan is the principal of three summit Investment Management. He’s a portfolio manager and investment strategy expert, Andy podcaster. Dan, tell us a little about your personal life’s more about your work and why you do what you do?

Dan Irvine 0:34
Well, personal life, my wife and I have two boys, eight, and four. And we spend, we just try to get them outside as much as possible to be on the water hiking, traveling. So that’s when I’m not working. That’s what I love to do.

About my work, I am the founder of an investment management firm called Three Summit investment management. We manage investment portfolios for individuals and small institutions, small institutions, or we usually define as are usually defined as charitable organizations, foundations, endowments, nonprofits.

I think this will be important for maybe later in our conversation, but small institutions are usually about 100 million and below. And a lot of people think, Well, that sounds pretty big. But what’s interesting about the industry is they’re still 100 million in losses, usually generally still a retail investor, they generally still have the same investment options that are available to smaller investors that may have $20,000 or $100,000. In a in a portfolio. So it’s a there’s a there’s a gap in the market there. So that’s what the firm does we service smaller retail investors. Why I do what I do. I love this question. I think everybody should ask themselves this question. And I it helps. When you understand why you’re doing what you’re doing, I think it just helps give purpose and meaning behind your work. So anyway, George, thanks for asking me that because it gave me a chance to think about it. So I don’t know, George, your your listeners may be may have felt this before. But most people are suspicious that the quality of investment management that they’re getting from a financial advisor or that are just available to them, whether they manage themselves and they look for somebody to help them is inferior to what larger investors may have access to, you know, common refrain that you hear among people is the markets are rigged against the little guy. And that is generally correct. So I founded three summit with one singular goal. And that was to level the playing field for smaller retail investors. There’s three main advantages that large investors have. So like I said, people understand that there’s, they’re probably don’t have access to what some of the more successful larger investors have, but they don’t necessarily know specifically what those things might be. And there’s really three advantages that large investors have. The first one is that 90% of their focus, which I think surprises a lot of people is in risk management. And that is just a fancy way of saying avoiding large losses. So what bigger institutions understand that a lot of smaller retail investors don’t is that risk management is an additional source of return. So if you lose less, through your investment journey along the way, you have periods where you’re losing less than other investors along the way, you have a high probability of ending up with more at the end. So that is why surprisingly, most of their focus is on risk management. The other point is that large investors have a more advantageous fee schedule available to them, they have better fee structures. And what that means is, it’s pretty easy to understand is that given the percentage of investments that they that they are the percentage of their assets, they invest, they pay less and feast for the returns that they get. So that is that can become a very big advantage over time. And then the final one is they have access to better investment strategies. And specifically what I mean by that is better investment strategies that help them manage risk. So investment strategies that allow them to have a better chance of reducing the size of their investment losses along the way while not taking away too much from their potential return. So I you know, just to wrap it up, I would say what I Say leveling the playing field for retail investors. That’s what I mean. I mean, eliminating these disadvantages for retail investors.

george grombacher 5:07
Nice. Well, I appreciate that. And just real quick, I’ve got a five and a two year old there blahs people are always like, Oh, just just have a run around outside but get tired. I’m like, my kids, don’t they have this inexhaustible gas tank? I feel like I could run them forever. I don’t know if that changes over time.

Dan Irvine 5:26
I don’t think it does. I bought a trampoline thinking that might help me do it hasn’t made much of a difference. I don’t know about you. But I did.

george grombacher 5:36
Yeah, well, fair enough. All right. So risk management. As as you were talking, I had a flashback to a great Warren Buffett, quote, a conversation about just rule number one is don’t lose money. And I think that I, as much as I think about finance, personal finance, I forget that that’s such a foundational thing, and maybe even out of sight out of mind, is just the people that just not on our radar.

Dan Irvine 6:06
It’s not I think it’s it’s behaviorally wired into us, you know, we are very sensitive about our money. We love to make higher returns, we like that a lot. And we really hate to lose money. So it just creates weird behavioral tendencies. And, you know, the other thing that it does is because of the because it’s so sensitive, we’re so sensitive to losses. Behaviorally, we tend to go into like a first order type of thinking. So when we’re losing money, we can’t think rationally or try to understand what’s happening or make smart changes at the time that it’s happening. Because we’re our brains are just reacting to what’s going on. So Warren Buffett is exactly right. And he was he’s all he’s doing is saying exactly what the biggest investors know, already is that the key to success really is is not losing large amounts of money at any given time along the way. You want to keep your losses small. I don’t know if you want to expand on this a little more, George, but I would. So I think it gets into I think what’s most just key for investors, and that is understanding the math behind investment losses. Even professional investors forget, because of what I was saying to first order thinking, they forget about the math, even though they know what the math is on our returns and our work and how losses work. They still frequently ignore it or their behavior overrides the, you know, the logical way of thinking about things. But a simplistic way to look at it is the way that we process markets on a daily basis. And maybe people can relate to this is you we’ve had some market volatility lately. So say the market goes down 5%. And you’re really bummed out, you’re having a bad night, next day, you’re watching the markets. And by some miracle, the market goes back up 5%. Well, people’s natural reaction is Oh, thank God, I’m back to where it was, please, I didn’t lose anything. That was a scary drop. But I’m back to where I was. And in reality, you’re not, you’re still down 25 basis points. Point two 5%. Doesn’t seem like a lot. But losses compound like gains compound. And then there’s an even more important point about large losses, large losses, disproportionately impact a portfolio and that some people say, Well, that makes sense. If I lose 10%, I gotta get 10% to get back. And that’s actually not true. If you lose 10%, you need 11% To get back to eating. And then the calculation gets grows exponentially your hurdle grows exponentially as the losses grow. So if you lose 20%, you need 25%. To get back, even if you lose 40, you need 67. And then finally, if you’re 100% invested in stocks and 2008, and you lose 50, you have to have 100% returns to get back to eat. So people really underestimate, opportunity cost in the market. It takes a really long time to recover 100% To get back to work just where you were. And markets go in cycles. They go up for a period of time they go down. Well, if you’re spending the whole upcycle recovering from the previous down cycle, you aren’t getting ahead you’re taking one step forward, two steps back. Smaller losses allow you to take one step forward half a step back. So your your compound you’re continuously compounding on higher average account values is the Hear

george grombacher 10:01
it, it is rough for us to get our brain around that because you know, it’s natural. I’d lost 5% got 5% back today, I’m back to even but then how it compounds and talk about if you if your portfolio drops 50%, you need to what is it? 100% 100%?

Dan Irvine 10:18
To recover? Yep, yep. And you know, just those small losses than the 5% example. For a technical term, it’s called volatility drag. But just think about it, you know, the, if the market stocks are some of the most risky investments that you can invest it, they’re very, very volatile. People are seeing that right now. When you have up 3%, down two and a half percent, down one and a half percent, up one and a half percent, right, you’re, you’re compounding these fractional differences. So when the market went down, 3% recovered to you didn’t recover 2% of the 3%, you recovered less than that, and that fraction gets added on. And so it creates a continuous headwind to investing. So high volatility creates continuous headwind, and it’s. So that’s why, you know, risk management trying to trying to aggressively reduce how much you lose is so important.

george grombacher 11:22
I think that people are starting to better understand the fee structures and to ask better questions about how much is Dan making? How much is the firm charge and how much the investments cost? And all those things, which I think is really important. And if we don’t understand that, those are some of the important questions you should be asking. I wanted to just kind of stay on this the risk management piece, he talked about how the third advantage that more institutional larger clients or portfolios have is access to better investment strategies and better risk management. And you just said aggressive risk management? What are some of those? Some of those strategies are things that people can do?

Dan Irvine 12:02
Good question. A couple things one is a invest in diversify your assets out a little bit. Everybody knows diversification, they understand that, but they don’t do it. Quite enough. So for example, gold. Gold is a great diversifier in a portfolio a lot of people have it and they say I have I have 2% of my portfolio in gold, that, you know, being more aggressive with out of the box allocations. 8% 10% in an environment like this is good for a really over portfolio, because what it does is gold, while there is some correlation to stock, it doesn’t move with stocks, is often and when stocks really have problems, gold tends to do the best. So having a constant allocation of say, 8% in gold, can really moderate your portfolio, and you just have to get used to it looking different than the market. So you want your portfolio to look different from the market, and that some people have a hard time internalizing that, because they’re watching the market, the market may be up 3% They’re up one, but they’re not noticing that one day when the market was down, you know, 2%, they were down point two 5%. And so, being comfortable with not looking like the market, and is important. So So gold is a great one. Another good strategy is trend following. So there are now ETFs as the ETF market has evolved, that do it yourselfers and individuals can get access to trend following strategies. So one particular ETF family that that does them is trend violet. Now these are simple moving averages. So basically what they do is they look for momentum in prices. We talked about how prices move in cycles. And so when stock prices are moving up, they tend to move up longer. And until that site until that trend reverses. So what they do is those strategies look for changes in the trend. When the trends moving up, they’re heavily invested in stocks, when the trend switches and starts to move down, they move to more defensive assets like bonds. So that’s a great option. And then the the Another option is a buffer strategies, which are also available through ETFs. And that’s where you participate in a certain percentage of up moves in a market. So say you’re capped at 9%. So you get to participate in if the s&p moves up 9% You participate 100% You get 9% returns. But if the market moves down, you’re protected from anywhere between 15 and 20% On the downside, so if the market goes down 30% You’re still going to show losses but they’re going to be significantly less. So all of these strategies combined in a portfolio, you should not go all in on any specific strategy. But including strategy diversification. And a portfolio can be really powerful.

george grombacher 15:12
If that makes a lot of sense. And those are, those are great. So consider, or at least, think about adding gold to your portfolio just in the spirit of, we don’t want our entire portfolio all of our assets to look like the stock market. So considering using that, and then trend following strategies and buffer strategies, those are excellent. I love it. Well, Dan, those are solid, but the people are ready for that difference making tip, what do you have for them?

Dan Irvine 15:40
Difference making tip? Well, I recently read a great book by James clear called atomic habits. And the main, the main topic of that book is making incremental change. So instead of setting goals, it’s achieving what you want to achieve through incremental change. And I think it applies to success in all areas of life, quite honestly, making incremental changes. But in finance, investing personal finance, it’s just as relevant. You know, if you want to save more money, start, don’t make a small incremental change, go and cancel some subscriptions, monthly subscriptions that you don’t use very much or you can live without. And it may seem like a small difference, $14 a month, $20 a month. But those changes add up. And so if you’re wanting to save the making those small changes, what you’ll discover is they’ll make you aware of the other things that you’re doing. And soon, you can start to develop the habits that you want to do, you don’t necessarily have to set a goal that says I’m going to cut my expenses by X dollars a month, you just make incremental change towards where you want to be headed. So I think that’s a that’s a great tip in life. Yeah,

george grombacher 17:02
I think that that is great stuff that definitely gets a Come on. That’s what it’s all about. Right? So like I can’t lose 100 pounds in a year maybe. But if I just chip away at it over the course of three years or whatever, there’s there’s no doubt I can probably change my entire life. But it’s all about those incremental little changes.

Dan Irvine 17:19
So absolutely what you have kids, I know from my perspective, my you were saying losing 200 pounds, like that’s a tough goal, like not likely to work out my goals since I’ve I guess is to fluctuate in weight less.

george grombacher 17:34
There you go. I love it. Well, Dan, thank you so much for coming on. Where can people learn more about you? How can they engage with you? And through summit Investment Management?

Dan Irvine 17:42
That’s great. Well, you know, I’m passionate about this topic. So we have a lot of educational pieces on our website, I think that’s a great place to start. We’ve got a video series that people can learn about investment losses and managing how they can apply techniques to lessen their losses. So that’s it, three summit number three summit.com. I think that’s a great place to start with resources.

george grombacher 18:10
Excellent. Well, if you enjoyed this as much as I did, shut down your appreciation and share today’s show with a friend who also appreciates good ideas below two, three summit.com. That’s the number three su MIT comm and check out that great video series that Dan was talking about. Because I know that even from my perspective, I don’t think about our focus enough about risk. So the more that we can learn, educate ourselves, and then once you know, then it’s a matter of well, what do I do about it? So that video series I know will be very, very helpful to check that out.

Unknown Speaker 18:42
Thanks again, Dan. It’s a pleasure. Thank

george grombacher 18:44
you for having me. And until next time, keep fighting the good fight. We’re all in this together.

Transcribed by https://otter.ai