Active Investment Management
There are many different strategies, philosophies and theories for investing, but for simplicity, we narrow it down to this: buy & hold vs. active management. Buy & hold investing holds true to its name—the investor buys an investment and plans to hold it until an unspecified time in the future. The theory behind this is that the market is ultimately efficient and will most likely be above the entry level at some future point. This strategy is effective—in theory. The problem with buy & hold investing is a lack of risk management.
Risk, when dealing with investments, is defined as the variability of an investment's returns over time. Active investment management works to provide full-time oversight, backed by years of experience in the financial markets and a risk-averse philosophy. We take an active role in the ongoing process of investment selection and risk management with the objective of improving a portfolio's risk/reward relationship.
Some would argue that diversification is the most effective way to mitigate risk. The idea is that by spreading assets over multiple areas of the market, the entire account would not be negatively impacted if parts of the market are in a decline. However, as the 2007-2009 financial crisis has shown, there will be times when the markets as a whole experience the decline. During this bear market, only the government bonds sector experienced any protection from loss. Therefore, all other asset classes in a diversified portfolio would have been exposed to the market risk during this time.
Active Management relies mostly on the advisor's attempt to evaluate the market and make prudent investment decisions. Despite the advisor's best efforts, not every investment decision will be profitable.
All of our investment management programs are designed in an effort to reduce volatility while providing competitive returns. These programs provide investors with the comfort of having their assets managed in a well-defined, organized process that strives to reduce the effects of emotion in the decision making process of investing.
Moderate Growth Program
Our most widely used management program is the Moderate Growth Program. This investment strategy, like all of our investment strategies, involves the study of the market's direction in relation to the forces acting on the market. Our objective is to reduce risk by attempting to detect major shifts in the market's direction and momentum early in the market cycle. To accomplish this, we strive to position the portfolio's investments in a manner that they will benefit from the change or be minimally affected by declining markets.
During periods of perceived growth opportunities, the portfolio will be positioned to participate in the market's move. When the market appears to have topped out and market risk is perceived, the portfolio will be positioned to provide some protection. If we can avoid some of the weak periods in the market and participate in most of the strong periods, the portfolios will experience competitive returns with less risk than buy & hold investing.
Below is an example of how the Moderate Growth Program could be aligned during the different market environments:
All asset classes, ranging from Small Cap International Growth Funds to US Government Bond Funds and all sectors and asset classes in between may be found in each model's fund universe. This broad range of investment choices enables us to capitalize on upward trends in the market, while having the ability to retreat to defensive positions during a negative equity market environment.
The Moderate Growth Program is managed by using a combination of sector strength monitoring over intermediate periods of time and daily technical risk/reward analysis. Assets managed within this program are divided among 13 models. Each of these models is managed in a manner that allows the portfolio to rotate away from weaknesses in the market and into potentially stronger positions. As the economy experiences cycles in various sectors, the financial markets often respond to those cyclical movements. There are optimal periods in these cycles to increase equity exposure, just as there are appropriate times to increase exposure to commodities, bonds or the money market. Our sophisticated technical chart analysis, coupled with daily reviews of the market and economic data, enable us to monitor market trends to detect periods of sustained up or down movements. This provides disciplined, non-emotional, systematic "buy" and "sell" signals as the market changes. Based on these signals, the portfolios are moved between various sectors and asset classes.
Aggressive Growth Program
The Aggressive Growth Program is managed similarly to its moderate growth counterpart. The objective in this management strategy is still to manage risk. However, because of its more aggressive nature, this program has the potential to be more volatile. The major reason for this potential volatility is that the Aggressive Growth Program will allow for overconcentration into certain sectors and asset classes of the market. Since shifts to certain areas of the market are predominately created by strength and perceived momentum in these areas, it could be common to see multiple positions in one or two sectors being added amidst a major move in the market. While both the Aggressive Growth and Moderate Growth Programs will present this opportunity for overexposure, it is not common to see more than two positions representing one area of the market in the moderate growth version. This is the fundamental difference between the two programs.
The Aggressive Growth Program is managed with assets divided into 14 models (one more than the Moderate Growth Program). This is to increase the potential for more diversity into the process, even when multiple models are allocated to the same sectors of the market. Below are examples of how this investment strategy could be aligned if certain areas of the market are showing strength and other indicators are confirming the appropriateness of larger exposures to those areas.
Conservative Growth Program
The Conservative Growth Program was developed for the investor that wishes to add some consistency to investing. In an attempt to reduce volatility, this program will experience more conservative returns when compared to overall market performance over longer periods of time.
This program is a unique management strategy that blends a tactical asset management long/short hedging technique with a core position which has an objective of potentially producing a positive return in both up and down market environments. The Conservative Growth Program consists of a proprietary blend of Strategic Asset Allocation (the core position of the portfolio) and Dynamic Asset Allocation (the tactical part of the portfolio).
Core Positions
The purpose of the core positions is to maximize the portfolio risk adjusted returns by allocating this portion of the assets into a select group of mutual funds. These funds were selected after an in-depth analysis of each of their profiles, objective, management team and style, historical performance and perceived potential risk. The core positions will be monitored daily for relative performance. However, the positions will change infrequently, as this portion of the portfolio is considered passive in management style.
Active Positions
The purpose of the active positions is to utilize a tactical asset management process using long and short techniques. This portion of the portfolio is designed to pursue growth opportunities while attempting to reduce risk during times of uncertainty. Funds indexed to asset classes are typically used with one to three funds being allocated to these positions. Funds indexed to the inverse of an asset class may also be used to attempt to hedge part of the overall portfolio.
The breakdown of the allocation for the Conservative Growth Program is seen in the pie chart above. The three green sections represent the active positions which are managed using Dynamic Asset Allocation. The other colored sections represent the arrangement of the core positions which are managed using Strategic Asset Allocation.
Overall, the Conservative Growth Program is best suited for investors that strive to attain conservative returns relative to broad market performance. This portfolio has the objective of losing less in a declining market, but will most likely gain less in a bull market.
Frequently Asked Questions
How do I know which investment strategy is right for me?
A well thought out investment philosophy provides a stable foundation upon which to base your decisions. Once you clarify your own investment philosophy, it will simplify your investment decisions.
Each of our programs is designed to provide certain levels of risk management. Your unique goals, objectives and risk tolerance levels will play the most important role in which program(s) you choose to participate in. Periodic reviews of your progress toward your goals will indicate if the management program you are participating in is still appropriate.
Where will my assets be held?
One of the advantages to our investment strategies is that they can be employed on a variety of investment platforms. However, the majority of our clients choose to use Charles Schwab & Co., Inc. (Schwab) as custodian of their managed accounts. They provide us with a sophisticated block trading platform and make over 1,000 no-load mutual funds available. They provide clients with monthly statements, transaction reports, online access, and tax reporting (for taxable accounts) at no cost. There are also no annual custody fees or IRA fees.
(If the account is taxable) How will my account be managed regarding taxes on gains?
Taxes can be a tremendous expense to investors, mainly because mutual funds can be tax inefficient. Taxable consequences regarding the management of your account are taken into consideration. However, our top two priorities are asset protection and the pursuit of growth. This simply means that if there are tax liabilities on your account, your account most likely experienced gains. This, after all, is usually the goal.
How often will I receive statements?
Usually monthly, but no less than quarterly. This depends on where your accounts are custodied. Schwab sends out monthly statements. They will also send you trade confirmations, prospectuses, tax information, and provide you with online access. From your online access you may choose to receive some or most of this correspondence electronically.
We will also send you a quarterly report. This report will show your current positions and performance. This performance is shown net of fees and a comparison to several broad market indices is provided. Also in this report is a quarterly newsletter written by us. This newsletter will provide a review of recent market activity, show insight into our investment decisions, and attempt to forecast what's next for the market.
Can I have online access?
Yes, Schwab provides online access to your account. From here you can view your balance, current positions, and recent transactions. You can also choose to receive some or most of your correspondence electronically.
Terminology
Aggressive Growth:
Emphasis towards maximum capital gains or appreciation; offers higher potential growth, but usually with above-average volatility. Typically appropriate for risk-tolerant investors. GO BACK
Asset Class:
A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main broad asset classes are equities (stocks), fixed income (bonds) and cash equivalents (money market instruments). Each asset class is expected to reflect different risk and return characteristics and will perform differently in any given market environment. GO BACK
Bear Market:
A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market and selling continues, pessimism grows more rapidly. Although figures can vary, a downturn of 20% or more is generally accepted as the simple definition of a bear market. Including the most recent bear market, lasting from October2007 through March 2009, there have been 17 bear markets in the U.S. since the Great Depression. This is an average of at least 1 every 5 years. GO BACK
Bull Market:
A market condition in which the prices of securities are rising and optimism surrounds the market. The opposite of a bear market, a bull market is generally defined as a 20% up move in the broad market which lasts at least six months. Rallies of shorter length that take place inside of a longer term bear market are defined as a bear market rally.
Conservative Growth:
Cautious; having a risk-averse investment strategy which has preservation of capital as a high priority, but also contains growth elements that can participate in market appreciation. Both equity and fixed income funds have marked related risk. Investors can and will lose principal value if the underlying investments purchased reduce in value. GO BACK
Custodian:
A custodian is an agent, bank, trust company, or other organization which holds or safeguards an individual's, mutual fund's or investment company's assets for them. One that is entrusted with guarding and keeping property or records. GO BACK
Diversification:
A risk management technique that mixes a wide variety of investments within a portfolio. The rationale is that diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. GO BACK
Dynamic Asset Allocation:
An investment strategy that seeks to produce high total returns irrespective of the performance of market indices. GO BACK
Index:
A statistical measure of change in an economy or securities market. An index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of change from a base value. Thus, the percentage change is more important than actual numerical value.
The Standard & Poor's 500 (S&P 500) is one of the world's best known indices and is the most commonly used benchmark for the U.S. Stock Market. Technically, you cannot invest in an index. However, investment vehicles exist that are used to allow investors to invest in securities representing broad market segments and/or the total market.
Inverse/Short:
An investment vehicle that is constructed by using various derivatives for the purpose of profiting from a decline in value of an underlying benchmark. These investment vehicles are designed to perform opposite to the intended benchmark. GO BACK
Investment Objective:
The result desired by an investor, such as current income, capital preservation, capital appreciation, or aggressive growth.
Investment Platform:
The custodian company that is offering the trading execution for your account. Examples are: American Funds, Fidelity, Hartford, Invesco AIM, Nationwide, NFS, Oppenheimer, Prudential, Putnam, and Schwab. GO BACK
Market Cycles:
A trend or pattern that may exist in a given market environment, allowing some securities or asset classes to outperform others. The securities themselves may exhibit price patterns in their trading.
Market cycles take both fundamental and technical indicators (charting) into account, using securities, prices, and other metrics as a gauge of cyclical behavior. Some examples include the business cycle and the movement of interest rates. GO BACK
Moderate Growth:
Reasonable; not excessive or extreme; having a risk-averse investment strategy which has reasonable growth of principal as a high priority, but can also contain both growth and protective elements. Market risk will be prevalent. Investors can and will lose principal value if the underlying investments purchased reduce in value. GO BACK
Risk Management:
The process of identification, analysis and either acceptance or mitigation of uncertainty in investment decision-making. It is essentially an attempt to quantify the potential for loss in an investment, and the appropriate action (or inaction) is taken given the overall objectives. GO BACK
Risk/Reward:
A ratio used by many investors to compare the expected returns of an investment to the amount of risk undertaken to capture these returns. GO BACK
Strategic Asset Allocation:
A method of investing that establishes and adheres to a set allocation mix. This is a proportional combination of assets based in expected rates of return for each asset. GO BACK
Tactical Asset Allocation:
A method of investing in which investors modify their asset allocation according to the valuation of the markets in which they are invested. Thus, someone invested heavily into equities (stocks) might reduce his position when he perceives that other securities, such as bonds, are poised to outperform stocks. GO BACK
Volatility:
A statistical measure of the dispersion of returns for a given security or index. It can either be measured by using the standard deviation or variance between returns from that same security or index. Commonly, the higher the volatility, the riskier the security. GO BACK