Our Philosophy: Asset Allocation
A personalized approach to diversification and risk management
We believe that asset allocation is the single most important decision that an investor must make when investing. Deciding what portion of your portfolio to invest in each major asset class (stocks, bonds, alternative, and money market) can be incredibly complicated because of all the options. We feel that an effective asset allocation strategy tailored to your individual situation is one key to long-term investment success.
We feel that an effective asset allocation strategy tailored to your individual situation is one key to long-term investment success.
When assets are invested over time, the key driver of variance of portfolio returns has been the asset allocation decision.
Ineffective diversification simply adds more securities, without enhancing returns or moderating risk.
There is no single asset allocation model to fit every investor, or for every stage of life. The asset allocation decision is a personal one.
The Power of Diversification
Stocks and bonds are distinctly different (ownership versus a loan). Bonds generate income and mature on a specific date. Stocks are designed to generate wealth and fight inflation but are subject to market risk and volatility. And then there are alternative assets (Long/Short, commodities, etc.) that dance to a totally different drummer. By evaluating the expected returns and levels of risk, along with how the securities interact with each other form the basis for diversification.
Diversification at the asset class level is called asset allocation. Among equities, we define asset classes by:
- Company size
- Geographic location
- Price factors
With fixed income, we classify bonds by their:
- Duration (price sensitivity)
- Credit quality
- Structure
We create strategic asset allocation models by identifying the expected returns of established asset classes, along with the expected volatility (standard deviation) and the relationship with each other (correlation).
An individuals time horizon and risk tolerance typically change as they age. Younger investors tend to invest more aggressively and as they get older (and have more to lose), they shift to a more conservative allocation.