Our process for designing, implementing and monitoring a portfolio consists of five primary steps.
- Work with you to create a Financial Life Plan- a roadmap to the goals you wish to achieve and the financial requirements to get there.
- Create an Investment Policy Statement (IPS). It’s a document unique to you that spells out the guidelines for your investment portfolio.
- Develop the investment portfolio- based on the risk, return and other factors discerned in your Financial Life Plan.
- Implement the portfolio. This involves moving, establishing or reallocating accounts to align with the desired allocation.
- Monitor and adjust as warranted. As the allocation drifts or the goals and expectations for the portfolio change, adjustments may need to be made.
There is, of course, more to each step. But together they create a process to bring order, clarity and consistency to the management of a client’s investment assets.
Financial Life Plan: The plan is a holistic view of your goals, your current and potential future assets, your risk protection (insurance), asset distribution (estate plan), and such. As part of the plan we work to assess your tolerance for risk through surveys and conversations with you. The return on an investment and the risk associated with it are linked. More potential return comes with more potential risk- of loss in this case. Ignoring or thinking it’s not true in your case (“it’s different this time”) - can lead to unpleasant outcomes. In addition, if you truly understand the risk you’re taking and it makes you uncomfortable (trouble sleeping?), you’re probably taking too much risk and seeking an unrealistic return. In addition to looking at your “sleeping risk”, we also work to assess your capacity for risk. While you may be able to sleep through any level of risk, your ability financially to absorb the losses associated with a level of risk may be limited. You just might not be able to afford them.
Investment Policy Statement (IPS): An IPS is a document designed to bring structure and continuity to the investment process. It’s similar to what endowments and foundations use to bring long-term continuity to their investment process. An IPS addresses things like:
- The target rate of return being sought.
- The level of acceptable risk.
- The target asset allocation.
- The parameters for changing or rebalancing the portfolio.
- The types of investments to be used, and any to be avoided.
It compels TWS and you to be systematic and disciplined in our decision-making. It helps ward off panic as well as greed. It helps avoid misunderstandings and unpleasant surprises. Contemplating decisions that veer outsight the IPS parameters raises a red-flag-warning to stop and reassess. If something truly has changed, the IPS may need revision. IPS revisions, though, should not be taken lightly.
Portfolio Development: A portfolio has to take into account a number of things. In an ideal world you’d just lump everything into one account, choose from any available investments anywhere, and be done. But we don’t live in an ideal world. Rules, tax-consequences, and even emotions all come into play. It may be that an account must remain in a certain place- for instance a 403b or 401k retirement account at your current employer. There the investment options and perhaps the quality of specific options may be limited. Or there might be specific investments that have limitations or consequences of selling. An annuity with time left on the surrender charges may, for financial reasons, need to be kept for the time-being. Sometimes folks have investment assets to which they have an emotional attachment. It could be stock in a particular company that was given to them by a parent or even grandparent. They want to keep it.
In addition, we have to decide what investment options are appropriate to use. There is seemingly an infinite (not really, but…) selection to choose from. Individual stocks and bonds. Mutual funds- active and passive. Exchange-traded funds (ETFs). Open-ended and closed-ended mutual funds. Real estate, precious metals, “alternatives”. Our investment philosophy follows our core beliefs:
- Risk and return are always linked- always.
- The market is, for the most part, efficient
- Trying to beat the market, long-term, is a costly and losing proposition
- The returns sought should align with those needed. Shooting for the moon can lead to sinking to the ocean bottom.
- Investment costs matter.
- Losses can be more devastating financially than not getting the highest return.
- Activity is not itself wisdom. Sometimes doing nothing is the wisest course of action.
TWS is not a stock-picking firm. We focus mainly on using mutual funds and ETFs to create low-cost, primarily passive investment portfolios. We rebalance per the client’s IPS but we don’t trade to chase returns. Our goal is to invest prudently in alignment with your goals and risk profile. We monitor economic trends and incorporate what we learn into our process.
Implementation: Creating a plan, assessing your risk profile, drafting an IPS and developing a portfolio are important activities- but a waste of time and effort without implementation. While some advisors insist- or must in some cases- transfer your accounts to their custodian or broker-dealer, TWS as part of its process takes into account the location of assets. Retirement accounts at your current employer can’t be moved. There may be reasons to not move other accounts- due to investment costs, tax consequences, or even access to some investment options. Where appropriate, or desired by the client, assets can be held at TWS’ custodian. This allows us to assist our client in making appropriate changes to the portfolio and to actively monitor the accounts- things which are more limited for accounts kept elsewhere (“held-away”). What’s most appropriate is discussed with you and incorporated into the IPS.
Monitoring: As important as implementation is, and it is, just setting-and-forgetting is a poor strategy. Things change over time. The returns on stocks, bonds and even cash vary, so a portfolio of 60% stocks, 35% bonds and 5% cash may, over time, become one that is 70/22/3, or even 54/40/6. But with those changes comes a change in the risk and return profiles of the portfolio. So you want to rebalance back to the original allocation. Rebalancing helps you sell high (selling the “winners”) and buy low (buying the “future winners”). It’s also possible that your goals have changed and the return needed to fund them has increased or decreased. You may have experienced better-than-expected returns and you’re “ahead”, so you can invest a little more conservatively. And maybe something about the economy has fundamentally changed and it needs to be accounted for. So monitoring and rebalancing are an important and necessary component of investment management. The strategy appropriate for your circumstances is another component of your IPS.
That’s it- how we do it. Not flashy. But it’s a process that covers the bases and makes sure the things that are important are accounted for. There’s a hot-tip of the day every day. But not that many seem to work out. If you’re like most of our clients you’re not looking to hit home runs. That leads to too many strikeouts for your taste. Singles, some doubles- and who knows- maybe a homer once in a while can lead to long-term financial success with a lot less anxiety.
READY TO TAKE THE FIRST STEP?
Schedule your no-charge, no-obligation Introductory Phone Call.