We are advocates of Modern Portfolio Theory (MPT), and we believe that your overall asset allocation is the primary determinant of long-term portfolio performance. Pioneered by the Nobel Prize winning economist Harry Markowitz, MPT looks at the performance of a portfolio of assets based on the combination of its components’ risk and return. He was able to demonstrate how and why a diversified portfolio reduces risk for an investor. Markowitz also introduced the concept of the “efficient portfolio”, in which the investor takes on the least amount of risk for a given level of portfolio return. To achieve this “efficient portfolio”, we utilize mean-variance optimization (MVO) as one of the main tools in our portfolio construction. MVO considers asset class returns, variances, and correlations in order to create a portfolio that maximizes return for any given level of risk. In adhering to this philosophy, we believe in a diversified portfolio of stocks, bonds and cash that is tailored to each client’s desired level of risk.
Diversification reduces risk. Modern portfolio analysis has shown that even a random mix of investments is less risky than putting all your money into a single investment. In fact, the allocation of a portfolio (the amount of money divided between stocks, bonds and cash) accounts for 90% of the variability of return in the portfolio, rather than the specific investments themselves.
We believe in long term investing. If there is a known need for the money within a five year time horizon, than the money should be kept in a low risk investment vehicle such as a money market account, CD, or a high quality bond fund. For the stock portion of a portfolio, no-load mutual funds and exchange traded funds are often the best investment vehicles. Their built in diversification and low trading costs are virtually impossible for most investors to attain with individual stocks. We also look for funds with low turnover rates to keep the impact of taxes on your portfolio down as well as funds with low expenses.