Morningstar Advisor - February/March 2009 - (Page 18) Advisor Profile Dominick Paoloni, president, Investment Protection Service allocation, the theory for which Harry Markowitz won the Nobel Prize,” he says. Target Risk Manager “I do not consider myself a target return manager,” he says. “I am a target risk manager.” To manage this component of a client’s portfolio, Paoloni focuses on value at risk, a method of calculating probable portfolio losses by looking at historical volatility. By adjusting the portfolio to maintain a target standard deviation, Paoloni believes he can limit portfolio downside. “I run my models based on daily regressions, not monthly,” he says. “This will pick up current correlation shifts, which gives me a better current diversified model.” He makes minor changes to Morningstar EnCorr to run his regressions with daily data. But he doesn’t stop there. Paoloni describes his approach as “holistic.” “I believe that the more data points one can obtain, the more predictable and accurate the models will be,” he says. Paoloni believes that all systems have flaws, so he looks at a confluence of methods to overweight or underweight within his optimized mix. “By bringing together dynamic correlation, target risk construction, fundamental and technical analysis, as well as mean reversion and historical market cycles,” he says, “I believe we can build models that withstand times like now and give us a more consistent glide path to our clients’ goals.” Paoloni doesn’t consider himself a wellseasoned sailor on the ocean, but with his three model portfolios down only 7.28%, 11.57%, and 16.15% in 2008, it looks like smooth sailing for his clients going forward. K Ilana Polyak is a freelance financial journalist. How he caught our eye: Hosted successful radio shows on investing in Miami and Denver. Career path: The Bronx, N.Y., native graduated from the University of Colorado at Boulder in 1981. He went back to New York to work on Wall Street. He later started his own brokerage firm and then served as a national trainer of financial professionals. He returned to Colorado and opened his fee-based planning firm, Investment Protection Service, in 1993 in Lakewood. Personal: Enjoys skiing, sailing, cooking, playing piano, and hiking with his Great Dane, Don Vito. and held the Dow from 1966 to 1982, you would have lost 72% of your buying power in real dollars, adjusted for inflation,” he says. “It would have taken until 1994 just to break even. That’s 28 years of a lot of buying, holding, and hoping.” If we are currently in a secular bear market that began in 2000, Paoloni reasons, then buy-andhold investing won’t do investors much good. In fact, it could do a lot more damage. Paoloni says that too many advisors and investors who have seen devastating losses in 2008 are frozen into a buy-and-hold mentality. He points out how investors fared after the Crash of 1929. “Someone who owned the Dow in 1929 would have seen their portfolios decimated by 48% in two months,” he says. “The market rallied 48% over the next six months only to have the bear market end in the summer of 1932 with an accumulative loss of 89.9%. If investors are down 50% today, they shouldn’t think it couldn’t get a lot worse.” That’s where sailing is such a useful metaphor. Paoloni isn’t fighting the wind, nor is he going to let the storm take him where it will. Instead, as the winds change, he must adjust the sail to an optimal position to move the boat forward. “If correlations change and you don’t reallocate your mix, then you lose the benefit of asset 18 Morningstar Advisor February/March 2009
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