Asset Management Philosophy

The management of financial assets is the final phase of financial planning. It is at this stage, after the plan is approved by the client, that the pursuit of financial security begins. Remember, the management and preservation of financial assets to meet current and future goals is the very definition of financial planning.

Investing involves risk. This is simply a fact and it must be understood and accepted. Even US government securities, conceivably the safest investments available, are subject to various risks. For example, there is the risk that inflation will erode the purchasing power provided by the income from those securities and the risk that the value of those securities will be affected by changes in interest rates. Granted there is little risk of principal - you will almost certainly be repaid the face value of the security at maturity - but there are other substantial risks that must be considered in the design of your financial plan.

In discussing risk tolerance, however, we are generally referring to the risk characteristics of various investments and the client's ability to weather the highs and lows of the investment process. For example, equities (stocks) have historically outperformed fixed income securities (bonds) by a large margin, particularly on an inflation-adjusted basis. They are also, however, much more volatile and subject to wide fluctuations in market value from time to time. Further, the stocks of smaller companies tend to be more volatile than those of large, established companies, consequently, these investments have a tendency to be more stressful to follow.

We believe our client's risk tolerance is the single most significant element in designing a financial plan and investment program. We believe there are two measures of risk tolerance and both must be considered in designing a program. First, "risk capacity" is the client's financial ability to absorb a loss should it occur. We would never advise risking financial security to pursue a higher investment return. Second, "risk attitude" is the client's emotional ability to stay the course when market swings occur. Buying high and selling low - the natural consequence of chasing a trend - almost guarantees failure.

We consider it our responsibility to ensure our client has a clear understanding of the risk associated with any investment program we design. Risk tolerance can be fluid and changing, affected by changes in personal fortune and market or social conditions. We believe, however, a clear understanding of the nature of risk combined with continual oversight and review will temper the impact of these swings. Investment risk should not keep you awake at night.

We subscribe to the Nobel-Prize winning concept of Modern Portfolio Theory (MPT) to enhance returns and lower overall portfolio risk. "MPT" originated in 1952 and has become the standard for investment portfolios since the 1970s. The premise is that a properly balanced portfolio, containing a combination of selected asset classes, can improve investment returns and at the same time reduce the risk profile of the portfolio. In fact, later studies have shown that more than 90% of a portfolio's total return is attributable to asset allocation with the remainder a function of security selection, market timing and other factors.

We enhance "MPT" by continually rebalancing the client's portfolio to ensure that the proper allocation is maintained. We also focus on low transaction costs and minimizing tax exposure to further improve portfolio performance. Diversification is an important element in asset allocation. This means investing among a broad spectrum of asset classes and investment styles as well as investing in a number of different companies and industries. We utilize the services of specialist money-managers to provide our clients with recognized experts to manage the various elements of their portfolio.

You may have heard the statement, "The greater the reward, the greater the risk!!". We believe this is generally true but apply the concept on a broader scope. Proper asset allocation will reduce much of the inherent risk in a portfolio. In structuring that portfolio however, we feel it is important to evaluate the individual elements of the portfolio and compare them to alternative investments. A careful analysis will indicate which of two alternatives is most likely to meet your goals given the risk associated with each of them. Once again, risk is of paramount importance. We believe assuming increased risk must be rewarded by a proportionally greater return.

Total return is the most appropriate measure of portfolio performance. We are less concerned with the nature of performance - whether it is current income or capital appreciation - but rather that the overall performance of the portfolio is sufficient to meet the financial goals established by the client and meets risk parameters with which the client is comfortable.

Your portfolio should be balanced and diversified as no single investment style consistently outperforms another. Passive investing, a "buy and hold" approach or the use of index funds, frequently provides lower administrative costs, more tax efficiency and research suggesting superior long-term performance is possible. Active management offers the benefits of control over volatility, control of tax costs, and potentially superior returns by allocation and selection of portfolio holdings. We use both styles of management to ensure proper asset allocation, efficient and professional management and appropriate returns based on the client's risk parameters.