Hope Is a Strategy (Just Not a Good One)

Posted: July 18, 2024

“Hope is a dangerous thing. Hope can drive a man insane.”
–Red, “The Shawshank Redemption”

Still image from “The Shawshank Redemption” movie

If you ask my wife what puzzles her most about me, I imagine the short list would include my near-compulsion to stop on certain movies while channel surfing. I mean, I get it. How many times does one person really need to watch “The Martian” or “Tommy Boy”?

In my book, no movie is more re-watchable than “The Shawshank Redemption.” The 1995 Academy Award Nominee for Best Picture has it all: tragedy, comedy, and a great comeback story. Throughout it, a central theme is hope. For most of the movie, hope is characterized as a verb and a threat to the prisoner’s ability to cope with a life behind bars. In a key scene of the movie, the main character Red bristles at a notion put forward by Andy Dufresne that hope is a good thing, which makes way for the opening quote above.

I’m not trying to characterize investing as serving a prison sentence (though it can sometimes feel like it), nor am I saying that hope is a bad thing. However, the idea of NOT relying on hope as a strategy does resonate with me as a portfolio manager and trend follower.

Hope (Verb): A Poor Strategy for Financial Advisors

For financial advisors, the cost of misplaced hope can be unfortunate.
Many advisors have a triple-leveraged exposure to financial markets. As markets fall:

AUM-based fees fall
Attrition rates among clients tend to increase
The underlying equity value of their practice declines

If these are true, then financial advisors who can limit the risk of declines in the market improve their odds of increasing revenue, maintaining a stable client base, and increasing the value of their practice. In my opinion, these are some of the reasons why controlling the effects of the market (i.e., reducing uncertainty) should be a part of the basic job description for any advisor – and it takes more than wishing, hoping, and finger crossing to do this successfully.

Hope (Noun): Rooted in Preparation

The Blueprint Investment Partners team views hope as a noun. It is the result of thoughtful design and consistent execution. We have hope not AS a strategy, but BECAUSE OF our strategy, which is:

Straightforward (something financial advisors can explain to their clients in plain English)
Based on repeatable, transparent rules that are optimized for behavioral finance
Designed to dynamically adjust portfolios in response to market changes
Focused on managing downside risk
Able to provide ongoing tax-loss harvesting

“Hope is good thing, maybe the best of things, and no good thing ever dies.”
–Andy Dufresne, “The Shawshank Redemption”

What I’m about to say will be a spoiler if you’re in the same boat as my co-founder Jon Robinson, who still hasn’t seen the flick, despite having 30 years to do so. It’s a source of friendly conflict between us to be sure, and frankly he is not making a good enough effort to watch it, in my opinion. How am I supposed to enjoy the many great quotes from this movie if the man in the office next to me doesn’t know what I’m talking about?! I digress…

In the movie’s conclusion, after Andy escapes and Wardon Norton gets his comeuppance, Red is finally paroled (great scene with the parole board – but be warned this link to the scene contains a couple potty-mouth words) and makes his way (with Andy’s help) south of the border to meet up with Andy. The comrades embrace and the film fades to black. Hope does turn out to be a good thing but only after careful planning, patient execution, and a sewage pipe five football fields long.

Does that sound familiar, as a financial advisor?

Being an advisor can be stressful work. Between the markets, regulations, and complex client needs, it can make you feel like Andy in the sewer pipe (same warning about a potty-mouth word or two, but here’s the link). Our goal at Blueprint Investment Partners is to reduce the pain by implementing investment strategies and providing supporting services that result in hope: