An astute investor once noted, “Investing is simple, but that does not make it easy.” Much of the time, successful investing requires buying when others are selling and spreading your investments rather than concentrating them on a few speculative ideas. Our philosophy, therefore, is governed by prudence and a value-oriented investment style.
Through our financial planning discovery process, we work with our clients to build an investment policy statement (IPS). This statement helps both the client and our firm to outline and understand the risk preferences and income requirements that will enable us to tailor a portfolio strategy that meets the needs of the client while adequately reducing risk through proper asset allocation and diversification.
The first and most significant part of the investment management process is asset allocation. This involves strategically targeting a percentage of a client’s portfolio to be invested in the three major asset classes: equities (stocks, stock mutual funds or stock ETFs), fixed income (bonds, bond mutual funds or bond ETFs) and cash (money market funds, t-bills or short term CDs). Generally, these targets are based on age, risk tolerance and income requirements.
In the next step of our IPS, the portfolio strategy is further developed by allocating within asset classes to various sectors. Since these sectors exhibit different risk and return characteristics, when prudently combined, they tend to reduce overall risk while improving returns in the long run. Examples within the equity asset class includes the following stocks: value, growth, middle capitalization, small capitalization, international and emerging markets. Within fixed income, there are bonds: treasury, inflation protection, mortgage pools, corporate, international, high-yield and municipal.
The implementation of the portfolio strategy involves the buying and selling of various investment vehicles to create a prudent and well-diversified portfolio. These could include direct stocks and bonds, as well as mutual funds, exchange-traded funds, or a combination of these investments. As always, our portfolio construction process aims to build portfolios that reflect the long-term strategy as laid out in the IPS.
Financial markets are dynamic and investment opportunities are constantly being created. This may precipitate small changes in the portfolio within the context of the IPS. This may involve portfolio rebalancing back to the target asset allocation or subtle changes among sectors. As directed by our investment philosophy, we will attempt to buy what is undervalued and sell what is overvalued.