About You . | . Investment Philospophy

Our Investment Philosophy
Our investment philosophy recognizes that taking more risk does not necessarily lead to higher returns, and that increased volatility, expenses and taxes can greatly reduce them. Our customized approach constructs portfolios around your individual goals, tax situation, income needs, and estate issues. Our objective is to enhance performance on an after-tax basis while attempting to minimize your risk. Your specific investment policy will be based on a number of critical factors, including:

Specific goals
Key to your investment policy will be the goals you are saving for: retirement, college, future healthcare costs, a new home or other big purchases. Based on your specific goals and the time horizon for achieving them, we will set measurable objectives that your investment plan is intended to achieve.

Time Horizon and Risk Tolerance
Your investment policy will be based on your time horizon -- how long until you require your assets for a specific goal, and your risk tolerance -- the degree of uncertainty and volatility you may experience in regard to a negative change in the value of your portfolio, or how much of a deviation from your goal can be tolerated.

Nobel-prize winning research
Modern Portfolio Theory (MPT) is a sophisticated investment approach first developed by Professor Harry Markowitz of the University of Chicago, in 1952. Thirty-eight years later, in 1990, he shared a Nobel Prize with Merton Miller and William Sharpe for what has become the foundation upon which most leading institutions construct their portfolios. Based on statistics, MPT allows investors to estimate both the expected risks and returns for their investment portfolios. While the technical underpinnings of MPT are complex, and drawn from financial economics, probability and statistical theory, its conclusion is simple and easy to understand: A diversified portfolio, of uncorrelated asset classes, can provide the highest returns with the least amount of volatility.

Strategic Asset Allocation
Extensive academic research has shown that strategic asset allocation is the key determinant of long term portfolio performance, far more important in fact than the actual investments selected. The primary asset classes we use to construct portfolios span US stocks, Non-US stocks, bonds, cash equivalents, and alternative assets such as commodities and real estate investment trusts.
Our asset allocation process is based on the Efficient Market Hypothesis (EMH) which recognizes that for every level of return, there is one portfolio that offers the lowest possible risk, and for every level of risk, there is a portfolio that offers the highest return. After assessing a client’s goals, investment horizon and risk tolerance, we apply our knowledge of modern portfolio theory and efficient markets to assemble a strategic asset allocation that balances desired risk and return. Every investor should have a highly diversified portfolio designed to maximize expected long term return, after taxes and on a risk-adjusted basis.

Low-cost, Tax-efficient Investments
For most investors, we recommend a portfolio of mutual funds and Exchange Traded Funds (ETFs) because they offer much more diversification than individual stocks and bonds. We also recommend passive investments that do not attempt to “time the market” based on extensive research that shows that active trading generally does not lead to higher long term returns. When individual stocks are preferred, we generally recommend large cap, value-based stocks to minimize market volatility.

We usually recommend passively managed funds or ETFs for a number of important reasons:

• Lower fees: The average active stock mutual fund charges between 1.40% and 1.75% per year, whereas the average passive fund or ETF charges as little as .08 - 0.40%. Research has proven that most active funds, although they cost more, actually underperform their passive peers.
  
  
• No investment “style drift”: Active fund managers often trade into and out of positions outside of their investment style in an attempt to capture higher returns. This can create unintended changes in the overall asset allocation.
  
  
• No “cash” drag: Active mutual funds tend to raise cash at times of peak market volatility in order to meet anticipated investor redemptions, which can change the amount of market exposure the investor has at any given time and lead to a reduction in overall performance.
  
  
• Low turnover, low transaction costs: Because ETFs and passive mutual funds do not trade as often, they incur lower internal trading costs and pass on less unanticipated taxable gains to investors.

• Greater tax-efficiency: Unlike mutual funds, Exchange Traded Funds (ETFs) do not force investors to recognize capital gains until they sell the ETF, whereas mutual funds pass on any taxable gains every year.

Continuous Monitoring & Rebalancing
The real secret to “buying low” and “selling high” is quite simple: Rebalancing. Once a portfolio is implemented, over time, certain investments will outperform, and eventually outgrow their original target allocation. Likewise, other investments will underperform, and will be smaller than the original allocation. When this occurs, periodically, it is necessary to rebalance to portfolio to bring it back to the target asset allocation. In this way, good portfolio discipline forces investors to sell assets that have appreciated in value, and buy assets that have fallen in value. This is often the most difficult thing for individual investors to do. When stocks are falling in value and markets are fearful, most investors look to sell, not buy. But this is exactly the behavior that results in long term investing success -- what Warren Buffett referred to as “being greedy when everyone else is fearful.” Our investment process helps clients stick with their long term investment policy by setting specific rebalancing guidelines.