Outcome vs Strategy based

Outcome-Based Strategies Outcome-based investment strategies start with an expected long-term return. Often expected returns are based on recent trends or historical averages. Investors following this strategy presume that such trends or averages, be they economic, earnings, prices, or other factors, will occur as they have in the past.

For instance, Wall Street “gurus” often preach that stocks return 7% historically. Therefore, they say a well-diversified portfolio should expect the same 7% return this year, next year, and onward. Rarely do corporate and economic fundamentals or valuations factor into said forecasts.

Buy and hold and other passive strategies are primarily agnostic to valuation. They rely on the past repeating. These are outcome-based strategies.

The strategies can appear full proof for years on end, as we have seen for the better part of the last decade. However, as seen in 2000 and 2008, dramatic losses occur when these strategies are followed blindly without considering a portfolio’s risk/return profile. Outcome-based methods break a cardinal rule of building wealth; they fail to avoid as much downside as possible in bear markets.

“The past is no guarantee of future results” is a typical investment disclaimer. However, it is this same outcome-based methodology and logic that many investors rely upon to allocate their assets.

Process-Based Strategies Process-based investment strategies establish expectations for the factors that drive asset prices and returns in the future. Such analysis can include economic forecasts, technical analysis, and a bottom-up assessment of an asset’s ability to generate cash flow.

Importantly, they continually monitor those factors driving asset prices and change their views accordingly. Unlike an NCAA bracket, they can make changes as teams advance.

Process-based investors do not just assume that yesterday’s winners will be tomorrow’s winners, nor do they diversify just for the sake of diversification. These investors have a method that helps them forecast assets based on risk and reward prospects. They deploy capital opportunistically, not just based on a calendar.

At times, well-managed process-based strategies hold excess cash. Cash may impede results in bull markets, but the cash is a godsend when stocks prices are trading at substantial discounts.

These managers are not compelled to buy an asset because of its historical return.