1. Empiricism

Many robo-advisors and economists base their investment decisions on preconceived notions of how a “rational market” is supposed to behave given the information available. 

But the market is, at the end of the day, driven by human behavior—and humans aren’t always rational. Humans experience a range of emotions that can influence the market, from elation to FOMO to panic. If humans aren’t always rational, then it’s reasonable to believe that the market won’t always be rational. 

With this in mind, at Allio we strive not to have any preconceived notions about how the market is  “supposed to behave.” Instead, our focus is on  how the market actually behaves. We embrace data-driven empiricism to investigate how the market is behaving and why, and use insights from those investigations to craft our investment strategies accordingly.

2. Risk Mitigation

All investing involves risk. From market risk to inflation risk to interest rate risk, credit risk, and more—there’s no investment strategy that can completely remove risk from the equation. And the truth is, a certain amount of risk is required in investing; it’s in risk that the opportunity for reward exists. 

But that doesn’t mean that investors should load their portfolios with high-risk investments in hopes for a massive win. Strategic investing requires balance in order to prevent large losses that might derail your efforts. After all, large losses require even greater gains simply to break even. Investors who are able to limit large losses allow their returns to compound and grow from a higher base level. 

Here at Allio, we recognize the importance of balancing risk and reward, and of avoiding large losses. Our portfolio construction process focuses on the downside tails of the return distribution—in an attempt to make our portfolios as resilient as possible to market turbulence. 

Our competitors largely ignore these downside tails by assuming that returns are normally distributed. Instead, they focus on other risk measures, which we believe are substandard and don’t match the true risk profile that exists in the market.

3. Big Picture Thinking

Economic data like inflation, interest rates, jobs reports, GDP, and other metrics are among the many tools available to investors.

Taken together this data can paint a rich picture of where the market is and where it’s going. But focusing too much on a single datapoint is like trying to paint a landscape with just one color: It can’t be done. More often than not, it leads to a skewed understanding of the markets and a flawed investment strategy that can be difficult to recognize and correct until the damage has already been done. 

In building our investment portfolios, we don’t rely on any single piece of data. Instead, we seek to understand the big picture of macroeconomic forces that drive markets in order to determine the type of secular market regime we are currently in—and where we may be headed. We then align our portfolios with that market regime in the way that we believe will provide the optimal balance of risk and return. We continually look to discrete economic data points to corroborate or disaffirm our hypothesis, and make adjustments if and when necessary.