Investment Philosophy
As investors, we are focused on developing and implementing long-term strategic investment plans consistent with our clients’ goals, risk tolerance, and unique needs. Our investment beliefs provide the foundation for our processes and decision making.
Properly diversified asset allocation is the most important decision
- Proper diversification is holding the right kind of assets in the right proportions to efficiently target expected risks and returns.
- Asset allocation is the primary determinant of performance for a broadly diversified portfolio.
Disciplined portfolio management keeps an investment plan on track
- Consistent, systematic portfolio rebalancing maintains the targeted expected risk and return profile through time.
Investment-related expenses should be minimized
- Market returns are uncertain, but expenses are very certain, detrimental, and controllable.
- Low-cost, indexed strategies will form the core of the portfolio while actively managed strategies may be considered in less efficient market segments.
2 Wallick, Daniel W., Julieann Shanahan, Christos Tasopoulos, and Joanne Yoon. 2012. “The Global Case for Strategic Asset Allocation.” (July). The Vanguard Group.
Importance of Diversification
The best performing market or asset class varies from year to year – and there is not a way to predict the best performers in advance. Therefore, prudent investors diversify their portfolios to participate in the gains of top performers while mitigating exposure to the poorest performers.
In the early 1950s, Harry Markowitz laid the foundation for Modern Portfolio Theory by showing that proper diversification is not simply adding more investments to your portfolio, but combining assets that behave differently; specifically, those with less than perfect correlations.1 The optimal outcome is a portfolio of investment assets whose collective expected risk has been lowered without reducing the collective expected return.
Proper diversification does not eliminate risk, it minimizes risk for a given return expectation while improving the potential for a less volatile path towards achieving investment objectives.
Importance of Asset Allocation
Independent studies have proven that asset allocation overwhelmingly determines the risk and return behavior of any investment portfolio.1 Its not what an investor buys, its what an investor buys in relation to the other things they buy in their portfolio that matters.
Unfortunately, the asset allocation process receives far less attention as compared to the massive amounts of time and money spent on evaluating individual securities, sectors and geographical regions in the futile attempt to accurately predict where securities, and the markets in general, will go in the future.
A recent study by Vanguard found asset allocation explained, on average, 88% of a portfolio’s short-term return variability and more than 100% of a portfolio’s long-term level of return.2 These findings suggest security selection and market timing were meaningful detractors to a managed portfolio’s long-term performance.
Sub-Asset Class Contributions
The asset classes included in our asset allocation models are selected for the contributions they are expected to make to the overall portfolio. To further enhance diversification opportunities, broad asset classes are divided into sub-asset classes. The selected sub-asset classes, and their expected portfolio contributions, are summarized below.
Generally, more conservative asset allocation models have higher bond allocations with smaller stock allocations, while more aggressive asset allocation models have higher stock allocations with minimal bond allocations.
2 Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower. 1986. “Determinants of Portfolio Performance.”Financial Analysts Journal, vol. 42, no. 4 (July/August): 39-48. Brinson, Gary P., Brian D. Singer, and Gilbert L. Beebower. 1991. “Determinants of Portfolio Performance II: An Update.” Financial Analysts Journal, vol. 47, no. 3 (May/June): 40–48. Ibbotson, Roger G., and Paul D. Kaplan. 2000. “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” Financial Analysts Journal, vol. 56, no. 1 (January/February): 26–33.
3 Wallick, Daniel W., Julieann Shanahan, Christos Tasopoulos, and Joanne Yoon. 2012. “The Global Case for Strategic Asset Allocation.” (July). The Vanguard Group.
Rebalancing
Because markets and asset classes rise and fall, avoiding a drift over time from asset allocation targets is important to the investment plan. Disciplined, systematic portfolio monitoring and rebalancing helps to maintain the initially targeted risk and diversification guidelines.
While disciplined rebalancing provides no guarantees of improved returns over time, it does instill an inherent bias towards buying assets that have fallen in price and selling those that have appreciated – a buy low, sell high strategy.
We regularly monitor client portfolios and rebalance when asset class weights drift meaningfully away from targeted allocations.
