Priorities and Processes: An Advisor Talks About Success By, Chuck Root

There are three factors important for asset managers and individual traders/investors. In order of priority, they are:

  1. Risk
  2. Long-term viability
  3. Returns

Wait. Risk first? Long-term viability comes before returns? Shouldn’t returns be first – and by a wide margin?

Did I get these right but put them in reverse order? No. I put them in the order that fund managers and traders should prioritize. Why?

Ask clients, as I have done for many years, about their major concerns and they will answer consistently that risk is at the very top of their list. Yes, risk is the most important factor. If someone gets a 25% return one year but loses 20% the next year, they will be quite unhappy. They would rather have consistent returns even if those returns are moderate in size due to their lower risk tolerance.

In my experience, I have found that some people with multi-million dollar accounts are less sensitive to losing small amounts of money. People who are just barely able to afford retiring, however, are much more sensitive to losses—even small ones. (If you are an advisor with a minimum over $1MM for new accounts, you may still want to read the rest of this article because risk, long-term viability, and returns matter even for larger account sizes.)

Let’s take a deeper look at what the terms Risk, Viability, and Return mean to our firm.


Some people view risk as an awful word and it can be hard to quantify even for professionals who deal with it daily. In order to work with the markets effectively, however, understanding and quantifying risk is absolutely critical. Most people know (or should know) that when your account loses 50%, you need a 100% return just to catch up again to where you started the drawdown. There is also a point of no return for drawdowns—the point when your account has lost so much that it just can’t get back to break even within any reasonable amount of time.

We define portfolio risk for clients as a loss of 5% to 10%. The risk for individual stock or ETF positions is based on the difference between the purchase price and the initial sell stop. To help with this, we use a spreadsheet that calculates the risk in each position. The risk amount is also tied to the potential return for the position so that we can manage the reward-to-risk ratio. Our minimum reward-to-risk ratio is at least 2:1 and preferably higher.

Long-Term Viability

Long-term viability or as we refer to the topic, money management, is the method we use to keep the total balance at a sustainable level with no large drawdowns. We plan our purchases and ensure that the total portfolio risk is within tolerance before we enter any new position. We also know our initial stop exit and reward to risk beforehand. We look at the market trend and make probabilistic assumptions as to which direction it is headed. We want to keep as much of our gains as possible, therefore we sell into strength. When the markets turn abruptly, we use percentage trailing stops to keep the rest of the gains. We set the percentage trailing stops at 3%-4% when the gain is over 15% and we leave the trail a bit looser if the position is less than 15%. We have a set of spreadsheets (more on that later in the article) along with charting programs to facilitate our work.

Another aspect of long-term viability is our willingness to go to cash. We keep our powder dry as the market goes down so we can invest at or near the bottom. We use several methods for moving into cash and we keep more cash in our portfolios than most managers do, especially in rough times. When we have a 15-20% return in a position, I enter a percentage trailing stop, so that if the stock corrects, I keep much of the gains. As you have heard from Van many times over the years, keep your losses small and let the profits run.

When a trade closes, I leave the balance in a money market fund. I usually don’t liquidate our mutual fund positions unless the market goes much lower. For example, I didn’t liquidate funds in 2022. I hold aggressive growth funds that usually recover fairly quickly from market corrections, but those make up no more than 30% of the portfolio.


Return is the result of good trades and good money management. We set goals and we track performance. I simplified the process but it looks like this:

  • We set a return goal for each year and track that to see where we are at any given point.
  • We track each week’s return with downloaded data.
  • We track where we are in relation to the goal.
  • We also compare the account returns to the S&P 500 to see if we are beating the public benchmark but our primary goal is not to simply “outperform” the S&P. We would like to exceed the S&P benchmark all of the time. But sometimes, we lag because of risk management and because the benchmark is just an unmanaged index.

We believe low risk and lower returns at times is better overall and fortunately, we have found a few unicorns in our holdings over the last couple of years. These stocks really outperformed the markets and our clients benefited nicely. By adding new positions properly and keeping our gains, we have been able to deliver clients some spectacular returns.

The way we tie these three factors together in our business is through a plan, a strategy, and a process. Let’s look at some planning ideas, talk a little about strategy, and then go into our process.

Planning Considerations

Your planning would be best served by following a set of first principles. A financial advisor needs a set of first principles to guide their management and the relationship with clients. First-principle thinking sets the tone for the first decision, which then creates the way for the next 1,000 decisions. Simple value statements do not go far enough as they name values that everyone cares about to some degree. Instead, create a tree of basic information that can be used as a resource for all other decisions. Think through the trunk first then work out the branches and leaves.



First, let me share a little about how I arrived at our current strategies.

I started out managing my clients’ money with my own strategies in the year 2000. That was the year I “divorced” my “research department” at the time, which was in the brokerage company for my clients’ accounts. Prior to 2000, I had been following the research department’s models for some time. Those models and the client accounts, however, performed inconsistently year to year. It seemed like I was explaining to clients more often why their account was down for the latest period than why it was up. The money I managed then was mostly for people who couldn’t afford frequent drawdowns or for people who simply did not want to lose money frequently. I hated explaining so often to clients why their account was down.

Starting to manage client money with my own strategies wasn’t easy at first and as such, I started a process of evolving strategies. Now, I am always evolving them. Each market correction provides new insights as to why account balances go down and also points to any mistakes made during the downturn. Over time, I have added additional features and tweaks that have helped improve performance.

By studying and applying technical analysis, we achieved better results early on for our clients than I had been able to achieve using those research department models I had followed for years. Given a second chance, I would have started managing accounts on my own much earlier to gain more experience during up markets such as the late 1990s.

Now, trading strategies/systems are very personal as they are based on your beliefs. You have read Van’s maxim, “You don’t trade the markets; you trade your beliefs about the markets”. A great strategy for someone else may not fit you. That is, that strategy may not fit your beliefs so you will not produce the same results. You might even trade someone else’s profitable strategy only to find you are losing money instead. So rather than tell you about my technical based strategies, which are based on my beliefs, let me instead help you think about strategies with some (seemingly) simple questions.

  •  What are you good at observing?
  • What are you observing about the market today?
  • Do you see patterns in the charts?
  • Do you notice some stocks making new highs or lows?
  • Do you notice “sister” stocks? (Two stocks in a sector that perform similarly.)
  • Do you even look at a lot of charts?
  • What do you notice about the main indexes during the day?
  • Do you have processes to provide insight about which direction the market is likely to head—up or down?


You may want to incorporate some automation into your processes to manage lots of simple tasks. With automation, you set up the task once and never have to perform that task again. For example, my buy sheet for stocks and ETFs has a checklist that enables me to make sure I actually have a positive buy signal. This checklist used to lack anything about earnings announcements. Then, I bought a stock with a great chart just before the company announced quarterly earnings. The morning after their announcement, I had my hat handed to me in the form of a huge opening gap down. I don’t want to ever miss something again that could cause a large loss right after entering a position. So, the earning announcement date went on the buy checklist.

I like to have important information handy, especially when the market gets squirrely. My main spreadsheet is on the PC side of my iMac. I use Parallels to replicate a Windows environment since my real time data feed and XLQ are Windows based only. XLQ is an Excel add-in that automatically feeds updated prices and other technical information into Excel. XLQ is quite handy since it provides intraday prices, historical pricing, and company fundamental data.

I use XLQ information in several spreadsheets. My purchase spreadsheet allows me to see the gain or loss in each position right on the main page. The purchase workbook provides information about my risk, stop loss price and reward-to-risk ratio as well as weekly and monthly results. We update another spreadsheet weekly which gives me performance information and the cash position. Since we do block trading as a percentage purchase of the account value, knowing our cash level is important so we don’t ever want to over-invest the account.

These spreadsheets are nothing elaborate but they give me instant information on performance. Tracking records like this enhances our performance by keeping all the portfolio and position information in a central place.

Another aspect of our process is critical—the post-market review. I review our track record regularly to find any mistakes (not following rules) and errors in judgement. We keep a printout of the purchase criteria for each position so that we see all the reasons for the entry. In our review process, we ask questions. Did we put a stop on the purchase and what kind of stop? What was the risk-reward? On some occasions, we found we let the gain on a position get away without an updated sell stop. That gets logged as a mistake and we consider how to adjust our process to eliminate mistakes. We also do quarterly reviews to enhance our planning for the next quarter.

I did not have this effective process when I started managing money on my own. I have read Van’s material for many years and agree with his belief that NLP (Neuro-linguistic programming) methodologies provide ways to emulate processes other people use. I learned about many great processes from a queue of trading books that I read and re-read frequently. I have integrated key processes from others and continue to evolve them, especially when problems or issues crop up. I seem to have few problems or issues in bull markets and in most bull markets, I’m usually not in a big learning mode. When the markets go south, however, I go into an intense learning mode. 2022 has been a banner year for learning. Learning is a lifetime process for me and I believe the practice fits in nicely with how most traders try to evolve.


By keeping our priorities aligned with client priorities and keeping our operation organized, I have found that I perform better, I feel better, and I also feel more professional. When clients ask what’s happening in their account, we can tell them exactly with just one click. We have much better news for them usually these days compared to when I was using other people’s models for managing client money.


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