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Our objective is to develop investment management strategies that match your goals and preferences. First a brief explanation of goals and preferences:
- Goals: Your financial goals generally are unique in (a) their criticality and (b) time horizon. For example: “I need to pay off my $100,000 mortgage balance in 10 years when I retire” or “It would be nice to take a $5,000 vacation per year when I retire.” The first example may be very important and missing it would have unbearable consequences. In contrast, the second example is icing on the cake for you so you might be willing to take more risk to achieve it. The two goals also differ in timing. One has a very specific target date, the other begins recurring at some point in the future for an indefinite number of periods. These differences (criticality and timing) will effect our investment decision.
- Preferences: We have identified two general areas that affect how you measure investment performance:
- Risk tolerance: Do you worry about draw downs? Or are you not bothered by volatility which causes large swings in your monthly account statements?
- Index benchmarking: Do you want to perform in-line with the benchmarks that you see reported on the news every day? Or do you comfortable with a strategy that will perform very differently?
By documenting goals (with unique time horizons and priorities) and understanding preferences, we can seek to build a strategy specifically for you.
Meet the Portfolios
At the heart of our strategy are three core portfolios. The primary investment vehicle in each portfolio is low cost, passively indexed ETFs.
Broad exposure to income producing assets. The bulk of this portfolio is invested in domestic (US) bonds including Treasury, municipal, Build America Bonds, and corporates. A smaller but significant portion of this portfolio is invested in international and emerging market fixed income assets. The balance of the portfolio is invested in income producing equities (for example high dividend paying companies).
Broad exposure to equity assets, seeking exposure to large and small companies across the globe, including specific exposure global real estate, commodities and natural resources. This portfolio is designed to benefit from broad diversification and avoid over weight exposure to domestic equities and asset classes that hare highly correlated.
A portfolio comprised of assets designed to meet your specific cash flow need. These may include individual bonds or portfolio of bonds with a fixed maturity date. For example, if you plan to retire in 10 years and want to be able to pay off the balance of your mortgage upon retirement we would select a mix of bonds and ETFs (portfolios of bonds) that have a similar duration.
Traditional Asset Allocation and Rebalancing Tactic
Most savers are familiar with this time tested approach which combines three basic elements:
Broad diversification: Diversification can reduce volatility by combining asset classes that behave differently. For example, during times of uncertainty equities and natural resources may fall in value while bonds backed by strong credits tend to increase in value. By maintaining exposure to each of these different asset classes (and many others) you can benefit from reduced volatility throughout the economic cycle.
Buy and Hold: This strategy is appropriate for long term investors that don’t believe it is possible to “time” the market. There are, in fact, many good reasons to buy and hold, including reduced trading costs, minimizing current taxes, tracking benchmarks more closely.
Rebalancing: Periodic rebalancing sells assets that have experience strong appreciation and uses the proceeds to buy those that are under represented in your portfolio. For example, if your target allocation 50% equities and 50% fixed income but, due to a investor optimism your equity investments grew to 60% of your exposure then you would sell just enough equities to buy more fixed income investments to restore the original balance. One benefit of this approach is that, with discipline, it causes you to sell assets that may have over appreciated in favor of other classes that have fallen out of favor.
Trend Following Tactic
Many savers have grown weary of passively riding the markets’ ups and downs. For those that have, we offer portfolio management services that incorporate the trend following strategy made famous by Mebane T. Faber’s paper “A Quantitative Approach to Tactical Allocation.” This strategy uses moving averages (i.e. the average close price over a period of time) to determine if an investment should be over or under weighted. The strategy was developed to address the observation that volatility increases when an asset is priced below its moving average, combined with the tendency for investors to migrate out of an asset class when it is trending down. An example of this is presented in the chart below which shows a simple 200 day moving average applied to the S&P500 index. In this illustration, the buy (green) and sell (red) indicators are triggered by the index being above or below the moving average at the beginning of each month.