Investment Philosophy
and Approach
Part
of our initial interview
will be discussing
your investment objectives,
timelines, and special
concerns or needs.
In keeping with that,
we will craft or
select an investment
portfolio that will
help meet your needs
without undue risk.
As a result, we both
can sleep soundly
at night.
We do not accept everything that Modern Portfolio Theory (MPT) advocates with respect to efficient markets, optimal portfolios, strategic asset allocation, and the like. Nor do we agree that portfolio fluctuation constitutes risk (unless you need the money in the short-term). In this context, risk is properly defined as the prospect of permanent loss.
We concede that markets typically migrate toward efficiency, but as long as people are people—prone to fear, greed, or just plain foolishness—there will always be overreaction, creating opportunities to sell overpriced assets or to snap-up investment bargains.
As such, we favor a tactical approach to portfolio management rather than a strategic approach.
With a strategic approach, a target asset allocation is usually set—for example, 60% in stock categories, 30% in bond categories, 10% cash. This allocation then is usually not adjusted except for periodic rebalancing or if your objectives and timeline change.
On the other hand, a tactical approach is more active, shifting a portfolio’s allocation toward perceived investment opportunities and away from risks. This is not day-trading nor is it an attempt to precisely “time the markets,” which is impossible. But it is a recognition that investments and markets do get overpriced/underpriced from time to time, and that investment returns can be enhanced by an economically-aware and active approach to portfolio management.
To illustrate, we began reducing equity exposure and increasing cash for our clients in December 2007, shortly after the US stock market’s peak in October. We then bought good investments at lower prices throughout the market carnage of 2008. As a result, portfolio losses for our clients were typically a fraction of what other investors with strategic asset allocations experienced in 2008. Similarly, when the “bear market rally” raced ahead of underlying economic fundamentals in the spring and summer of 2009, we liquidated positions along the way and locked-in gains to help preserve client capital in the event of a pullback.
Given our tactical approach, it’s imperative that we be able to respond quickly on your behalf to market opportunities and guard against risks. Discretionary portfolio management is the best way to do so and, as such, we rarely take on non-discretionary engagements other than advice to clients who are locked into their employer retirement plan.
Clients taking retirement distributions (“retirement paycheck”) will typically draw from a prudent pool of cash/short-term investments in the portfolio. This helps avoid accelerated portfolio erosion from having to liquidate other investments when they’ve declined in value.
Client portfolios are invested with sensitivity to investment expenses and tax considerations. We are not beholden to any particular type of investment or financial product vendor. Advisory client portfolios may utilize any combination of ETFs, closed-end funds, no-load or load-waived mutual funds, common stocks, preferred stocks, bonds, CDs, non-traded REITs, etc. On occasion, we’ve been able to rescue clients with non-qualified money stuck in high-cost variable annuities by arranging transfer to a no-load variable annuity—without triggering income tax consequences.