The “Why’s and How’s” Behind TCI’s Investment Philosophy

A TCI Advisor will never call you and say, “I’ve got a hot stock pick.” That’s just not what we do. At our core, we’re fiduciaries, focused on serving our clients’ best interests. As a result, we base our investment philosophy on empirical data and a disciplined approach to building portfolios around factors of value, profitability, broad market exposure and each client’s needs and objectives.

We invest through the lens of “what would give our clients the highest likelihood of achieving their definition of success.”

For each client, putting the financial freedom puzzle together begins with a finish line backward approach. Where are we going? What do the end goals look like? How will it feel? Working closely together, we generate sophisticated financial models that project spending, retirement age, legacy goals, risk profiles and more. Then, working backwards, we build models that suggest how each client should be invested over the course of their life.

Since markets and personal goals change over time, we stress test our recommendations regularly, using decades of historical averages to look at the past. Then we look forward, using Monte Carlo scenarios. Maybe you were surprised by the name of this software but if you thought of glamorous James Bond casinos, you were not far off. The Monte Carlo Method was named after the casino town of Monaco. The software produces a range of future portfolio outcomes based on a variety of practical assumptions about your financial assets, market returns, your spending, longevity, and other factors to express, in percentage terms, a “probability of success.” We run these tests many times throughout the course of our relationship, to make sure we are putting you in a position to achieve the highest likelihood of success.

When we were founded, we thought we could outperform the wirehouse model.

Most of us, you and us, have likely had some experience with the wirehouse investment model. You’re probably familiar with how it works. You meet with your Advisor, who creates some sort of allocation for you, then doesn’t really talk to you again. If something goes wrong, you are probably the one to reach out. This type of financial planning is mostly a hands-off relationship. You don’t have a lot of input, and there’s generally not a lot of collaboration in the development of your financial picture.

Investments are just one part of a financial plan. There are so many other things that play an important role along your financial journey. Spending is important, as are risk assessment and protection, insurance, tax planning, estate planning and more. The wirehouse model often overlooks these components. Yet, they are key parts of TCI’s process.

At TCI, we believe that the relationship you develop with your Advisor will likely be one of the most important and intimate of your life. Or, at least, that’s what it should be. We believe in truly knowing the client, planning together as a team and meeting regularly – not just to assess the portfolio, but to review all aspects of the plan.

We use long-term data to help stack the deck in your favor.

A notable aspect of TCI is the consistency among Advisors in delivering financial guidance grounded in a common investment philosophy. As contributors to TCI’s investment committee, we help guide this philosophy. We believe that long-term data tends to provide the best indication of success and that tilting toward the most known variables tends to outperform. “Tends to” is the key phrase since nothing is guaranteed. It goes to the way we look at data, especially as clients edge closer to retirement.

If life expectancy is 95 and you’re 60, we’re looking at a 35-year plan. How do you use long-term data, incorporating many business cycles, to build a portfolio that maximizes return and minimizes risk over the course of a 35-year plan?

Look back at the 35 years we’ve all just lived through. Think about high inflation and rising interest rates. Think about COVID. Remember the financial crisis, the dotcom bust, Y2K, the oil embargo and all the cyclical market returns. Looking back 35 years, what asset allocation would have best insulated you from the risks–while putting you in the best position? It turns out that valuing profitability, buying small companies and diversifying market exposure would have helped maximize return.

When investing in markets, essentially, we are purchasing ownership in companies. It’s crucial to recognize that the longevity and performance of these companies are often tied to their cash flows. Companies with robust cash flows tend to exhibit greater resilience and potential for growth over time. Smaller-cap companies typically offer higher potential returns but come with increased risk.

In an efficient market, investors should expect to be rewarded for undertaking these risks. The foundation of constructing successful portfolios lies in an investment philosophy that identifies companies with strong cash flows, profitability, and an appropriate level of compensation for risk-taking. By adhering to these principles, investors can position themselves to build more resilient and potentially lucrative investment portfolios.

On the other end of the spectrum, large cap companies, especially mega companies, historically have lower expected returns because they tend to be more stable. From 2000 to 2010, globally allocated portfolios with market exposure as a factor tilt produced annualized return of 8 percent to 10 percent on the equity allocation, while the S&P 500 was negative over that same period of time.

There are no certainties in investing, but our investment philosophy has provided steady guidance for 30+ years.

Below are some additional principles that form the foundation of our investment philosophy.

Asset Allocation & Diversification

We believe in having a global market exposure instead of simply buying the U.S. market. The differentiation and movement of different markets over time tends to minimize overall risk while optimizing return. In addition to the correlation between foreign vs. domestic markets, we also think about correlated asset classes – stocks vs. bonds, real estate vs. broad equity markets, small caps vs. large caps, emerging vs. developed markets.

Tax & Fee Efficiency

The more efficient an investment is, the more return that stays in the client’s portfolio. Mutual funds that generate a lot of internal capital gains, or have high turnover, are going to be less tax efficient than an ETF with almost no turnover and the ability to minimize internal capital gains. Fees get a lot of attention, too. There’s a significant difference between a 1 percent fund and a .25 percent fund.

Timing the Market

Timing the market has always been ineffective. Consider the trader who wanted to go to cash because of COVID. The market recovery period for COVID was only three months, so the likelihood of timing that market was extremely low and almost impossible. The same is true of nearly any event throughout financial history.

What about other asset classes?

In client meetings we are sometimes asked why certain assets aren’t included in our portfolios, prompting discussions around risk management and alignment with clients’ overall financial objectives. While we prudently select asset classes for inclusion in our portfolios, it’s worth recognizing our deliberate avoidance of certain categories. Below are the assets we exclude and the rationale behind the decision.

Gold

It’s one of those commodities that comes up a lot in discussions with clients. It’s usually not about buying a gold ETF or mutual fund. It’s about buying the actual physical medium of gold. The question becomes why and what are you going to do with it? As a method of exchanging value, it is impractical. Are you going to bring your ingot to make purchases? Will the seller be able to value and accept the payment? Probably not.

Real Estate

We like real estate as an investment, more in the form of Real Estate Investment Trusts (REITs) for liquidity.

Private Equity or Debt

You’re locking up dollars, so you need to make sure that you’re getting a liquidity premium. We don’t recommend these assets when you’re nearing retirement and will need to convert dollars from your portfolio into lifestyle.

Crypto

Due to its extreme volatility, we don’t hold crypto in our client portfolios.

No plan is set in stone.

For each client, planning and modeling creates an investment roadmap, but there will always be detours along the way. Taking the finish line back approach gives us the set parameters, the mathematical answer. Over time, criteria will change. Opportunities will arise, challenges will appear. Emotions will become involved.

We understand, and we’re here to help.

Clients build lifelong relationships with us because they want to have a financial quarterback in their corner, someone who’s not only looking at their investments, but also their tax planning, estate planning, insurance and more. They want someone who can make sure they are best positioned to live the life they want, up to and through retirement.