Understanding Your Risk Tolerance with Manish Khatta
FEATURING: MANISH KHATTA
Q: Tell us about Potomac Fund Management. How does your team serve independent financial advisors?
A: At Potomac Fund Management, we have a long history of being an investment strategist providing risk-managed, tactical model portfolios to independent financial advisors. We strongly believe that the best portfolios are diversified across trading strategies and include a mix of both tactical and passive investing styles. The Potomac model portfolios are available on many major turnkey asset management programs (TAMPs).
Additionally, we recently launched Union, our own in-house TAMP because of an overwhelming response from advisors who yearn for more hands-on and attentive customer service. Union is an all-in-one solution for independent advisors, streamlining the entire client experience. This covers everything from digital account opening, to a client portal, to financial planning, to trading and reporting. We wanted to give advisors the ability to run their core business functions efficiently and simply from a single point of entry, rather than manage the constant hassle of (seemingly never-ending) integrations.
Q: The chart above shares an equal-weighted Model Portfolio of nine major airlines (LUV, DAL, UAL, AAL, ALK, JBLU, ALGT, SAVE, HA). It’s clear the airlines are struggling. How does this visual help you tell your story?
A: No one wants to hear boring macro level stats. Stories resonate with people and I love to share these via various social channels.
Obviously, our economy is struggling right now, and this is clearly apparent with industries connected to travel and leisure. The fallback for many investors is to simply look at an ETF that tracks a specific sector. For example, if you want to look at the airlines, you could use the US Global Jets ETF (JETS). However, this can mask the true story of what’s happening domestically and with specific airlines.
Using the Model Portfolios application in YCharts, I am able to populate only those airlines that represent the majority of domestic travel. This chart shows the performance of a portfolio holding nine major US airlines at equal weights — which is down 50% year-to-date. The image is worth a thousand words!
Q: Model Portfolios is one of our most popular applications. Can you share how you leverage the tool and the ways it helps you in your work with advisors?
A: The Model Portfolios application in YCharts is where we do a lot of the analytics for our model portfolios. For example, if we want to examine the risk statistics of a proposed allocation, we can quickly import the model’s holdings into YCharts. From there, in a matter of seconds, we can see historical beta, standard deviation and maximum drawdown. As a risk manager, this is critical to our decision-making process.
In addition, Model Portfolios is vital to helping us get a sense of the underlying asset class allocation and holdings. Since we mainly use ETFs and mutual funds, it’s important to ensure sector weightings match the risk constraints of the model or you could be in for a surprise when volatility strikes.
Q: What is your perspective on the current state of the markets and economy? How do your tactical portfolio management strategies protect investors from risk during these challenging times?
A: I am a big believer that there are very few “bad” investments but tons of “bad” investors. The state of the markets and economy should have zero bearing on how you manage your money. The worst investors are always the ones who chase performance. The best investors properly gauge their risk tolerance, and then diversify across investing styles like Passive and Tactical.
For those investors approaching the decumulation years, Tactical is a compelling story if you want to mitigate volatility during the distribution phase, but it needs to be used properly. Investors who think Tactical is going to capture all the gains and avoid all the pain will be disappointed.
I always tell people that you can golf with one club, but you won’t be very good at it. With investing, it’s no different. Diversify and use all the tools at your disposal while adhering to your risk tolerance.
Q: You’ve been a YCharts client for a long time. What advice would you give to advisors and asset managers who are considering using the platform?
A: The beauty of YCharts is the ability to quickly access data via a clean and well-designed user interface. If you need deeper analytics, you can export any data point to Excel using their Excel Add-in where the sky’s the limit.
An added bonus that we’ve been especially happy with is the custom Excel work that YCharts can do on your behalf. The YCharts Excel team has helped us create custom models to calculate all sorts of data points for our model portfolio fact sheets. You can get data from many providers, but YCharts’ customer support sets it apart.