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Our Investment Approach:

Simple Idea #1 -- Balance the three Asset Super Classes: Owning, Loaning and Reserving

The single most important allocation decision is the balance between Owning, Loaning and Reserving. Owning stocks, property and commodities, versus Loaning money to banks or bond issuers, versus Reserving cash or near-cash will have more to do with your results than any other decision about investing.

Probably 90% of your results will come from this basic choice, and only about 10% from all other decisions.

These are the three primary asset classes. All other "classes" are just sub-categories. The strategic and long-term plan, as well as the tactical and short-term plan ultimately hinge on the choice of and movement between these three classes.

Own Loan or Reserve

Simple Idea #2 -- Invest In Quality

Invest only in liquid securities with quantitatively attractive fundamentals, with a tilt toward dividend income growth stream.

Simple Idea #3 -- Match Portfolio to Cash Flows Needs and Liabilities

Your investment portfolio is not only about pursuit of realistic returns; it is also about risk management. Matching investment assets with capital expenditure needs, and matching investment cash flows with needed spending from investments are among the most important aspects of tailoring portfolio risk management for you as a unique investor. You shouldn't be in a stock model. You should be in personalized design.

Simple Idea #4 -- Know Your Risk Limits and The Risks in Each Position

A balance between growth potential and loss potential is essential. The more mature your assets (the less ability to replace assets with future earnings) the more the balance should lean toward conservation and sustainability -- reducing loss potential at the expense of growth potential. The less mature the your assets (the more the ability to replace assets with future earnings), the more the balance should lean toward potential growth with the associated assumption of more risk.

The risk budget should take into consideration at least factors per security and in the aggregate:

Avoid inadvertent risk concentration by seeking minimally correlated assets.

Simple Idea #5 -- Divide Allocation Between Portfolio Roles: Broad Core, Income Core and Tactical Opportunity

The overall asset allocation plan should include a set of allocation policy target weights (target weights) for each class. A collar of minimum and maximum weights should accompany the target weights. That provides some short-term flexibility around long-term allocations. We prefer to sub-divide asset classes into these three categories:

We organize allocations and security selections within a matrix of Asset Super Classes and Portfolio Roles that looks like this:

To assure that a single class has the potential to contribute meaningfully to portfolio returns; the minimum weight should be 5% per class.

To minimize exposure to security issue selection risk, no active management fund or non-core index fund should have a weight more than 5% (core, broad market index funds may be weighted to the extent of the asset class weight). No individual stock or bond should be weighted more than 1.5 to 2%.

Simple Idea #6 -- Modified Tactical Rebalancing

Manage to target asset category weights, but do so tactically. Shift assets between categories to adjust weights when they get substantially out of line, not just on specified calendar dates. Be willing to "store" assets for a category in cash during significant downtrends, and then restore the risk position with that cash at the target weight when an up trend recurs.

Simple Idea #7 -- Use Benchmarks to Measure the Effectiveness of Portfolio Decisions

A simple benchmark consisting of some published index or combination of indexes should be selected against which to measure the management of the actual portfolio.


IMPORTANT NOTE: We are a Registered Investment Advisor. We do not sell investments or have custody of client assets, nor do we participate in capital gains on managed accounts. We are professional advisors compensated on an hourly basis or flat fee basis for portfolio management or for our coaching advice. Clients for personal investment advice receive recommendations and guidance tailored to their specific needs. Newsletters and research publications, are not personal investment advice, are generic in nature and should not be interpreted as specific advice for any specific person or situation. In our research, we utilize information sources that we believe are reliable, but do not warranty the accuracy of those sources or our analysis. Opinions expressed in any of our commentaries, anywhere on this site or in our publications, or in any republication of our materials, are as of the date of publication, and may not represent our views at subsequent times. Our opinions and positions may change as subsequent conditions vary. Past performance is no guarantee of future performance, and there is no guarantee that any forecast will come to pass. Do not rely solely on this material when making an investment decision. Other factors may be important too. Investment involves risks of loss of capital. Consider seeking professional advice before implementing your portfolio ideas.
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