Investment Philosophy
Successful portfolios are based on research and reasonable expectations, not intuition. Illogical investors attempt to guess which manager, stock or asset class will have tomorrow’s best performance. That’s why so many have consistently failed. Successful, rational investors excel because of a clear methodology and, of course, discipline.
What type of investor are you? What type of investor do you want to be?
For the past fifty years, modern finance has been exploring the most efficient methods of achieving global market returns. The findings have been a boon for individual investors who have put forth the effort to learn about them. We strive to achieve principal preservation, capital enhancement and inflation protection for our client portfolios.
Diversification
A successful investor is able to benefit from the types of risks that capture expected returns and diversifies away the uncompensated risks. Exposing yourself to too few stocks or limiting your portfolio to specific countries or sectors can threaten your portfolio. Broad diversification across thousands of different companies, in different countries and industries is your best defense. The greater the amount of securities, the safer your outcome.
Allocation and Structure
A group of securities that exhibit similar characteristics or behave similarly in the marketplace is commonly referred to as an asset class. There are several asset classes represented in the global markets, for example small stocks, international stocks, bonds, real estate, domestic large stocks, etc., to name a few. Each of these asset classes demonstrate average price movements that are distinct from one another. Investors can benefit by combining the different asset classes in a structured portfolio. In this case, the portfolio as a whole is more valuable than its underlying parts. The end result is usually a higher expected return and a lower level of risk.
Management Strategy
Structuring a portfolio around the ability to get paid for specific equity risk factors renders individual stock selection useless. Rather than analyzing individual stocks, investing it simplified down to the decision of how much stock to hold versus bonds, and how small or large, and value- or growth-tilted the stocks should be.
Most fund managers focus on the ongoing trading of individual securities while index fund managers while index fund managers simply hold the exact securities found in its appropriate index. Index mutual funds and exchange traded funds offer lower transaction costs, minimal asset class drift, and greater tax efficiency. Passively structured funds, however, endorse the idea of an efficient market, but are not held captive to the exact breakdown of a relative index. Instead, the funds can structure strategies based on scientific evidence rather than on speculation or commercial indexes. For example, small cap strategies can target smaller stocks more consistently while value strategies can target value returns with greater focus.
Portfolio Engineering
A pioneering study by renowned academics, Eugene Fama and Ken French, suggests that three risk factors: market, size and price dimensions explain 96% of historical equity performance. This model explains the fact that two particular types of stocks outperform markets on a regular basis: value and small-caps. While portfolios with exposure to small and value may have different risks than the market as a whole, they are not necessarily higher.
Deciding on the degree that your portfolio should participate in the three risk factors is the challenge for the investor. Exposure to small and value will help you reach above global market returns, but portfolio risk must be tempered by adding other assets with low correlations.
Tax Sensitivity
Taxes represent a significant consideration for every long-term investor. By minimizing income taxes, investors retain more wealth to help meet their goals. We exercise care in the appropriate placement of investments within taxable and tax-deferred accounts. For example, we generally place the most tax friendly and tax-managed vehicles in taxable accounts and higher turnover mutual funds in tax-deferred accounts. However, tax considerations do not dominate our portfolio management process.
The Risk Factor
Investors get paid for accepting market risks, that’s true. But taking calculated risks is a far more effective way to achieve your desired returns. Risk is a real threat to wealth accumulation. Investors that hold concentrated portfolios are bearing far more risk than justified by the expected return. Concentrated issues include individual stocks, industry, sector and geographic concentrations. There is no separately priced risk element for any of these concentration issues, and no additional return to be anticipated by bearing these risks. Our primary goal as your Advisor would be to maximize your expected return, however, it must be commensurate with the specific risk you are willing to accept.
Your Personal Financial Help Line
We do more than just create financial plans or invest your assets, we help you make better financial decisions. When you have questions related to insurance needs, buying versus leasing, saving, buying a home, investing, retirement or other, you can call us. We serve as your sounding board to help you make informed decisions that will impact your financial future. That’s what makes our Advisors different. It’s like having your own personal financial helpline.
We want to be there for you every step of the way to help you navigate the often complex life changes that will affect your financial future.
