Systematic Exposure

Vol #17- December 4th, 2020

One of my favorite parts of helping clients with options strategies, is going through the initial product demo to discuss our Model Portfolios.

We talk about how the interface works, and how we’re working to make options strategies as simple as possible. We get great questions and feedback about the product.

One of the most important parts though is discussing what Harvested Financial’s approach to the markets is.

We design and implement options strategies that keep investors systematically exposed to persistent structural forces in the marketplace.

The equity risk premium is one of these factors. This is the idea that investors in equity markets earn a premium over the risk free rate of return (typically benchmarked with US government debt) because of the extra risk they take for their investments. Time in the market, and extended investment horizons is one of the best ways to obviate this risk.

While the market will certainly go up and down over short periods of time, there is a long history of outperformance. Over the past 100 years the equity risk premium has averaged around 5% over the price of treasury bonds.

The volatility risk premium is another structural exposure factor for Harvested. The options markets present an opportunity for investors to lend their capital for insurance. By writing a single option contract, investors can earn the premium paid by those demanding coverage and certainty. Certainty has a cost, and being willing to accept uncertainty creates earning potential.

Like the equity risk premium, this ebbs and flows. Supply driven factors keep this valuation low during stable markets, which demands good risk management. On the other hand, volatility premia have an unconstrained nature in times of instability, which allows for significant opportunity capture. “If you can keep your head when all about you are losing theirs…”

The best way to capture both of these factors is staying systematically exposed. In 2018 Fidelity performed a study that showed what would happen to a $10,000 investment into an S&P 500 index fund from 1980 to 2018. If you missed the 5 best days, you’d only have 64% of the return of staying in the market. If you missed the best 10 days, you’d only have 48% of the returns.

Harvested Financial structures portfolios that aligns client objectives with market forces. Schedule a product demo to learn more.


Thanks for joining us,

Mark Phillips
CEO

Happy Friday!

In addition to thinking about persistent market forces described above, another area of interest for Harvested Financial is the 'psychology' of investing and finance. With our charitable organization Community Yield, we're building a curriculum around how to overcome the psychological and physiological factors that make money so hard.

Each of the modules we're developing is designed to approach traditional topics in personal finance through a behavioral lens. Debt isn't just about interest rates, it's also about about the anxiety and opportunity cost of that decision. Risk isn't a variable in an equation, it's a privilege.

One of the great personal finance authors of late is Morgan Housel, and he recently published a book called "The Psychology of Money". It's as if it was written for our mission.

Morgan walks through anecdotes of fabulous successes destroyed by lavish spending, and humble diligence turned into riches. He highlights how building wealth is less about spectacular investment returns, and more about a balanced equation of income versus spending.

He warns us against taking financial cues from people that are playing a different game than us. Keeping up with the Jones's is not only futile, it's blind. Personal finance is one of the hardest problems in finance, because everyone is different. Success is achieved not through display, but through harmony of objectives and using money to gain control of your time.

In order to have important conversations about money, we have to unburden the anxiety around it. Compounding of both interest and knowledge starts young, and avoiding pitfalls has a self reinforcing effect.