Investment Management

Investment Management

An investment portfolio is designed to accomplish various financial goals. Clearly defining your goals and risk parameters is essential for the proper development of a portfolio.

1 - Identify Your Personal Financial Goals and Risk Tolerance

An investment portfolio is designed to accomplish various financial goals. Clearly defining your goals and risk parameters is essential for the proper development of a portfolio.

The two main sources of risk that can’t be eliminated with proper diversification are volatility and purchasing power. Short-term, your greatest risk is volatility. On a long-term basis, the greatest risk is inflation. For this reason, as your investment horizon shortens (you’re approaching a financial goal, such as retirement) you need to cut back on the risk of your portfolio by investing more conservatively.

When your investment horizon is long and you are comfortable with short-term volatility, you should be invested in stocks to take advantage of their superior long-term rate of return. This is why knowing your objectives and desired risk level is so important for proper portfolio design.  

2 - Determine Appropriate Asset Allocation

Once clear goals have been established, they are used as our guide to determine your asset allocation ~ the mix of stocks, bonds, and cash in your portfolio. Realizing that no single market segment consistently produces superior results, we incorporate several asset classes into portfolios. Each of these investment categories has its own volatility and performance characteristics. Diversifying among them can smooth out the peaks and valleys in your portfolio thereby reducing risk and increasing the odds of receiving a superior long-term rate of return and achieving your financial goals.

3 - Select Portfolio Managers

After your asset allocation has been determined, our next step is to select the individual managers that will be in charge of each piece of your portfolio. We recommend a combination of managers for portfolios and use either mutual funds or individually managed accounts as appropriate. We utilize independent proprietary research to narrow the thousands of available choices to the handful that make sense for you. This extensive research involves numerous quantitative and qualitative screens including analysis of manager style, risk versus return, performance, cost, and tax efficiency.

We have access to all of the normal “retail” funds offered by brokerage firms. Additionally, we can utilize “institutional” funds available only to professional money management firms. These investments offer advantages over typical mutual funds in both design and lower costs.

Since the markets favor different types of securities at different times, even the best managers will have below average results every few years. Diversifying among multiple managers reduces the volatility of your portfolio and increases the odds for minimizing any losses and enhancing portfolio performance. Manager selection is as much an art as it is a science. Many people select managers solely on the basis of performance, yet studies show selecting managers this way is no better than flipping a coin. As the graph below illustrates, using 5-year track records, a top quartile manager has a 50/50 chance of being above or below average in the following 5 years.

Managers occasionally change their style of investing or change the average size of the companies they buy for portfolios. Our service includes continuously monitoring how the managers are making their selections and recommend replacing managers in the portfolio when necessary. 

4 - Monitor Results

Once your portfolio is designed and implemented, it will need to be monitored. Some investors will perform the tedious research required to assemble an appropriate portfolio, then fail to properly monitor the investments. Two main areas require constant supervision – managers and asset allocation.

Some managers will change their investment style or the types of securities selected. For example, let’s say you invest with a manager investing in small company growth stocks, however, due to asset growth the manager is forced to buy larger stocks. Without any changes that you initiated, you would end up with a portfolio that is no longer balanced.

Since managers are in high demand these days and often change employers, you may no longer have the same collection of portfolio managers working for you. Again, without any action on your part, your portfolio has changed. Additionally, your asset allocation may need to be modified due to a change in your financial plan, the economy or the markets.

5 - Adjust Your Portfolio

A portfolio will become unbalanced due to different rates of return for the various asset categories.  Let’s say you have a very simple asset allocation and start with 50% stocks and 50% bonds. Then the stocks increase in value to represent 60% of the portfolio. A portfolio with 60% in stocks is riskier than one with 50%. 

Re-balancing your portfolio accomplishes several benefits. First, it returns the portfolio to the initial asset allocation keeping the integrity and expected rate of return of the original design. Second, it rebalances the portfolio assets that have appreciated the most by using a disciplined approach to buy low, sell high. Third, it restores the portfolio to a chosen level of risk. Our service includes not only how to rebalance the portfolio, but when.

6 - Consider Tax Issues

Taxes are a very important consideration when constructing your portfolio. Compare two different portfolios – one that is very tax efficient and one that is not. Given the same rate of return, the tax efficient portfolio will generate a larger accumulation long-term due to the deferral of income taxes. To benefit from the tax system, we advise clients when it is a good idea to gift appreciated securities to charities or family members or establish charitable gift accounts or family foundations when it makes sense to do so. Few advisory firms have such a grasp of tax-efficient techniques.

Tax efficiency is an important consideration in the manager selection process as well as when we recommend adjustments to your portfolio. The performance ranking of managers, in fact, changes dramatically when you compare pre-tax and after-tax returns.

Obviously for tax-advantaged accounts, such as retirement plans, IRAs, etc., there is no need for concern with how taxable the return may be. Certain highly taxable assets may be used inside these types of accounts to your advantage.

Therefore, tax-advantaged accounts are designed differently than taxable accounts. Only by examining these taxability issues can an appropriate portfolio be assembled and implemented.

7 - Communicate on an Ongoing Basis

Communication is crucial in superior client relationships, so we use various avenues to stay in touch. Face-to-face meetings and telephone conversations are encouraged. In addition, clients receive concise and easy to read investment reports quarterly. We appreciate the fact that your goals and portfolio are highly sensitive and confidential. With this in mind, we spend the amount of time necessary so that you are comfortable with the whole process. Client satisfaction is our primary goal and receives the highest priority.