Managing Risk

Investment decisions and policy focus on the risk a client can financially and emotionally accept. Risk can maximize potential return investors are compensated for based on the proportion of risk, they are willing to take. Risk may come in different forms and offer differing expected returns for the volatility created. It is important to focus on these differing risk factors that affect return to create the appropriate mix of asset classes to meet a client’s tolerance. The primary dimension of risk is that equity is riskier than fixed income and has greater expected returns, so Investment Policy and risk management begins here.

Equity

With equity asset classes we seek the to have the most efficient compensating returns generated. In each client’s Investment Policy Statement, we define the target and tactical allocation for each equity asset class to meet their specific goals. These asset classes are allocated with a combination of individual equities, ETFs and mutual funds.

Fixed Income

Fixed income in investment policy can control portfolio risk. High quality and short-term debt instruments may lower portfolio volatility, allowing greater risk to be taken with equity asset class mixes in the portfolio. When approaching fixed income and assessing fixed income out performance return drivers, higher expected fixed income returns are likely to come from wider term spreads, wider credit spreads, and use of global currencies in fixed income denominated products. With this in mind, Investment Policy construction will take these factors into consideration.

Diversification

Diversification is necessary in our investing policy. Our goal is to properly participate in market upside movements and manage risk through asset class diversification. This allows for a targeting of long term expected return and volatility dynamics. Individual security concentration eliminates this ability and puts the portfolio at risk for company specific risk and economic specific risk. These are unwanted risks in a portfolio.

Cost of Investing

Costs negatively affect portfolio returns and must be considered while investing. We attempt to reduce portfolio cost by reducing internally generated product costs, using securities without cost, and focusing on tax ramifications of trading and portfolio management. Internally generated product costs can be reduced with a focus on fund expense ratios, and eliminating other internal fund costs, such as front end and back-end fund loads and fund 12b-1 fees. Further the use of stocks and ETFs also support cost reduction efforts by having little to no cost associated with their purchases and minimal if any expense ratios. The focus on tax minimization though limiting short term gains and end year loss harvesting also support our portfolio cost reduction methods.