Building your total portfolio

Step one

The most critical decision to your long-term investing success is to determine the appropriate asset allocation between equity and fixed income for your investment objectives.  This decision is driven by your:

• Time horizon, or the amount of time you plan to invest to reach your goals
• Tolerance for volatility and risk
• Target amount to fund your short, medium and long-term goals

Step two

We place a premium on diversification among asset classes and investment vehicles in building your strategic asset allocation strategy. The theoretical basis for building a diversified portfolio is based on years of research that demonstrate this approach may reduce the overall volatility of your portfolio with the focus of enhancing the longer-term total return.

We begin to develop your equity portfolio by focusing on a “market-neutral” posture; meaning allocating to domestic and foreign markets to mirror the respective share of each in the global stock markets.  For U.S. investors however, the benefit of investing in foreign markets on total return may be achieved with a smaller allocation to this asset class than represented in global stock indexes.

We also maintain for each client a neutral equity portfolio in terms of stock characteristics; value v. growth type stocks and size, small, medium or large companies.  We allocate an equal weight to value and growth styled investment managers and rebalance your portfolio on a regular basis to maintain this weighting. 

The process of diversification involves analyzing:

• Historical returns of various asset classes in both up and down markets
• The correlation of performance between asset classes
• The type of investment vehicle used based on cost, comparison to peers, and the amount of return gained based on the risk taken
• The equity allocation among investment style, size of the companies and domestic or foreign location

We may also incorporate into this decision process your “home bias”; meaning your preference for holding more or less domestic investments versus foreign.   

Step three

Building the fixed income allocation to your portfolio is next.  The purpose of fixed income is twofold:

• Provide stability to your overall portfolio in bad stock markets, and
• Provide income for reinvestment or to enhance your cash flow for living expenses

We focus a majority of fixed income assets on shorter maturity and high credit quality bonds because the greatest price stability is found in this group.  These assets also tend to have a very low correlation to the stock markets helping to reduce the overall volatility of your portfolio in bad stock markets. We may invest a smaller portion in higher income producing areas such as high yield and international fixed income investments.  These fixed income vehicles provide a higher level of income for those that are currently taking income from their investments, as well as providing further diversification for your portfolio.

Step four

The last step in our diversification decision process is to consider alternative vehicles that historically show a low correlation to equities and fixed income, particularly during bad stock markets.  The benefit to you by adding alternative investments is to potentially lower volatility over time and enhance the expected long-term total return of your portfolio.

If you have anything you wish to discuss with us, please contact us today for a consultation.