Investment Strategy

Asset allocation involves spreading your investment dollars over several categories of assets, usually referred to as asset classes. These classes include stocks, bonds, cash (and equivalents), real estate, raw materials, collectibles, and insurance products. Asset allocation represents a risk management tactic.

Very few people pick investments that consistently outperform the market. This includes professional money managers who employ large numbers of research analysts. Not only do these managers typically fail to beat the return of the overall market, they also incur substantial expenses in their quest to improve returns. These expenses reduce the portion of the investment return that stays in your pocket.

There are three main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor — some say the biggest by far — in determining your overall portfolio performance. In other words, the basic decision to divide your money 80 percent in stocks and 20 percent in bonds is more important than exactly which companies you invest in.

Second, by dividing your investment dollars among asset classes you can minimize the effects of market volatility while maximizing your chances of return in the long term. Ideally, if your investments in one class are performing poorly, you will have assets in another class doing well. The gains in the latter will offset the losses in the former, minimizing the overall effect on your portfolio.

Third, by focusing primarily upon asset allocation, rather than stock selection or market timing, you will lower the expenses associated with your investing activities. While it is quite difficult to control the prices of the market, it is much easier to control your investment expenses.

With this in mind, Exchange-Traded Funds (ETFs) instead of actively-managed mutual funds fit for most portfolios. Many diversified ETFs exist, and most invest in securities based upon a specific index. Since their investments follow a published index, it is easy for the investor to know, at all times, what investments the ETF holds. In addition, ETFs, maintain some of the lowest expense ratios in the business. In most cases, the majority of a client's investment portfolio will be invested in ETF index funds.

Depending upon the client's investment goals and tolerance for risk, sector ETFs, actively traded mutual funds, or other investment vehicles may be appropriate for a portion of the client's portfolio. These individual investments are based upon opportunities that may exist due to market conditions resulting in overbought or oversold companies or sectors. These investments may be traded more frequently than the rest of the portfolio. By investing primarily in index-based ETFs, investment costs are low and your portfolio diversified. By actively managing a small portion of your portfolio, return potential increases. This strategy achieves the correct balance of active investment management versus index fund investing.

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Investment Strategy