How Matco Thinks About Risk

We believe that setting investment expectations based solely on total returns is too risky an approach for Matco clients.

While we do employ traditional methods of managing risk such as bottom-up stock selection (reviewing standard deviation (risk), valuation (P/E), correlation) and top down macroeconomics relating to asset mix (monetary & fiscal policy, geopoliticial issues, relative valuation, portfolio construction), Matco also focuses on managing risk from an after-tax return perspective.

Managing your investments while focusing on total returns works well in an upward sloping market, but it doesn’t work well in flat- to downward- sloping markets. The negative impact of thinking about asset management based on total returns was dramatic and unfortunate during the 2008-2009 recession. Our clients are better served when we maintain a focus on after-tax returns, which is a far more reliable approach to managing the financial needs of Private Clients.

Total Return vs. After-Tax Return

Total return is the percentage a portfolio has grown over a certain time period. This value is often applied to estimate a portfolio’s projected return – and thus is used to set expectations on how much income a client can expect to receive from his or her investment.

After-tax returns are the actual amount of money received from an investment after taxes have been paid.

The risk of thinking about your investment return in terms of “total return” is that if you anticipate the total return on your investment to be 8% and you plan to use that 8% as income, you will need to supplement your income with money from your principle investment if your portfolio does not return 8%. This can erode the value of your investment over time.

To achieve the best possible after-tax returns, Matco employs a low turnover, tax optimized model whereby we seek to generate the highest possible risk-adjusted returns with the lowest amount of portfolio turnover including defering taxation into the future as far as possible through annual tax harvesting of capital gains.

How do you think about risk? See how it affects your investments with your Target Risk Portfolio today.