Wealth Management

All too often, average investors ‘chase the market’ and end up selling low and buying high.  Studies have shown that individual investors’ returns fail to keep up with returns from the S&P 500 index. The implied theory is that individual investors lack knowledge and/or self-control.  *DALBAR’s 2014 Quantitative Analysis of Investor Behavior

We strive to develop a customized investment strategy that addresses your income needs, time horizon, risk tolerance, and investment objectives.

Tenets

• Markets are efficient; that is, prices efficiently incorporate knowledge. This means that a freely functioning market does a good job of setting prices for the buyers and sellers of securities, and investors can expect to receive a reasonable reward for taking risks over the long term. This expected reward is not tied to picking the right stocks or determining the best time to enter and exit the market. Rather, it is the reward for supplying capital that companies need to fund their growth.
• Modern Portfolio Theory (“MPT”) is a theory of investment that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, each by carefully choosing the proportions of various assets.  We utilize these techniques to optimize returns for the level of risk for which you are willing to assume.  

Given that we don’t “time” the market and don’t try to “pick” the next hot stock, we focus on things we can control: asset class allocation, diversification, and costs.

• Asset class selection or “asset allocation,” is the predominant determinant of portfolio performance in long term scenarios.  Asset classes are generally organized into “equities” (think stocks), “fixed income” (think bonds), “cash” (think dollars), etc.  

Over time, as the different asset classes grow at different rates, the original allocation changes.  These changes trigger the opportunity to “re-balance” the asset classes.  This structured approach of re-balancing results in the investor selling high and buying low.

• In addition to allocation, Asset Diversification is another important aspect of MPT.  Diversification allows investors to optimize investment returns for given levels of assumed risk.  Generally, asset classes can be sub-divided into “buckets” that share similar characteristics.  

Having similar characteristics is often referred to as being “correlated.” For example, large US growth stocks are correlated.  Likewise, small US value, foreign development markets, emerging markets, etc., are correlated.  

Diversification increases as correlation decreases.  

Indexes have been developed to mirror or track these markets that share common characteristics.  In addition, mutual funds and ETFs have been developed to track these indexes.  

• Finally, we devote particular attention to ownership costs: trading fees, mutual funds expense ratios, tax efficiency, etc.  We constantly strive to build portfolios that minimize the total cost of ownership which can significantly impact your returns.

Because the index funds and ETFs described above track various indexes, they require less management, i.e., lower operating expenses.  

And because they provide opportunity for class allocation and optimal diversification, we utilize index based funds in our portfolio construction.