For a few examples of allocation models and their application to various investor profiles, please see the attached.
Prudent investing requires that the risks and returns of the portfolio align with the needs and objectives of the owners (our clients). Investors sometimes confuse ‘generating investment returns’ with practical investment policy so it is our responsibility to further define the objectives of the portfolio:
- Asset selection and retention
- Asset allocation
- Required return vs. desired return
- Portfolio’s risk (the probability of failing to meet the required return over the applicable investment horizon)
- Tax management
- Cash-flow distribution rate
- Asset location strategy
- Monitoring and evaluation
Following the analysis and determination of the portfolio objectives, the investment portfolio is designed utilizing the various exposures below based on the individual requirements of each client. Exchange Traded Funds (ETFs) are the preferred investment vehicle largely due to lower costs, diversification, liquidity, transparency, and tax efficiency.
- Core Equity – When an investor buys shares of stock, he or she buys part ownership in a corporation. As such, the value of that corporation's stock will tend to reflect the earnings experience of the firm — up during profitable periods and down during periods of loss. Generally speaking, the higher the potential return, the higher the risk. Even within the world of stocks, there are variations in risk and reward. Here, more than most places, a good offense is your best defense, and a well-diversified portfolio combined with an investment horizon over five years can weather most storms. We believe that most investors are best served by significant allocations to investments that represent broad markets such as U.S. Large Cap stocks, U.S. Small and Mid Cap stocks, International stocks, and Emerging Markets.
- Fixed Income - Bonds are a vital component of a well-balanced portfolio and a properly-constructed bond allocation can provide income, total return, and diversification. We believe the fixed income allocation should therefore serve a dual purpose – provision of cash-flows and defense against the typically more volatile equity markets. Investors are best served by a focus on “quality” with exposures in U.S. government and U.S. government agency bonds, mortgage-backed securities, municipal bonds, and corporate bonds with average maturities of 2-5 years.
- Liquidity - The ease with which an investor can access capital markets or is able to readily convert assets into cash to meet obligations. The primary objective is to provide an allocation in line with an investor's rolling 12-month cash need, bridging the gap between cash at the bank and the traditional fixed income exposure noted above.