Investment Philosophy

Philosophy: Control your ACTIONs

Nobody can predict what the market will do next week, next month or next year. You can’t control the market, but there are certain aspects of investing that can be controlled and managed to improve your financial success. These aspects can be summarized with a simple phrase - “Control your ACTIONs”. ACTION is an acronym that summarizes our investment philosophy. Click on each area to see how we implement it.

  • (A)sset Allocation

    How you divide up your investments is called your asset allocation. You could invest in only one or a combination of cash, bonds, stocks and alternatives. The point is that you can control how you deploy your assets. Asset allocation is the most important part of an investment plan. An allocation and how it is managed can have a significant impact on your retirement lifestyle.

    • Know the purpose of the portfolio. Is the purpose for growth, principal preservation, income, etc.? For what time frame? Two different goals and time frames (funding college in 5 years and retirement in 20) may warrant two different portfolios. The purpose of the portfolio drives its construction.

    • Determine an appropriate stock-to-bond ratio. The first step of construction is based on the purpose of the portfolio (what level of returns or income is needed) and personal factors (comfort level, experience, etc.). Risk tolerance is assessed from initial and ongoing conversations, not a one-time questionnaire. The stock-to-bond ratio that is developed serves as the foundation of the portfolio and helps determine its risk level.
    • Construct a broadly diversified allocation for the overall portfolio. You may have multiple accounts, but a single overall allocation should be used to tie them together. This holistic view can reduce confusion, costs, and taxes of managing a separate portfolio for each account.

    • Know what adds value. A sampling of index funds is not enough. Research shows there are tendencies in the stock market which can add value to your portfolio. These tendencies are known as “factors”. There are major factors, that are well-documented, and minor factors that initial research indicates as favorable, but are still being studied.

    Major Factors

    • Stocks – over time, stocks tend to outperform bonds
    • Size – over time, small caps tend to outperform large caps
    • Value – over time, value tends to outperform growth
    • Quality -over time, higher profitability companies tend to outperform lower ones

    Minor Factors

    • Low Volatility – over time, lower volatility stocks tend to outperform higher volatility stocks
    • Dividend Producing – over time, dividend paying stocks tend to outperform non-dividend paying stocks.
    • Recognize the role of bonds and alternatives. While stocks are the primary driver of returns, bonds and alternatives are used for diversification. Sure, they may provide income, but their primary role is to reduce the overall volatility of the portfolio. Bonds may also be used as part of a retiree’s Portfolio Income Buffer (CD / bond ladder) in order to efficiently provide cash for withdrawal needs.

    • Recognize constraints on the portfolio. Constraints such as limited 401(k)/403(b) investment options, taxable positions with low cost-basis, employer stock options, and investments with surrender charges need to be addressed with strategies on a case-by-case basis.
    • Consider client preferences. You may want to hold Amazon, a fund invested in robotics, a fund that invests in green themes, a utilities fund, or riskier bond funds with higher yields. Within reason, we can accommodate these requests.

    • Determine asset location to maximize tax efficiency. Place tax-inefficient investments in tax-deferred accounts and tax-efficient in taxable accounts. This goes beyond "put bonds in an IRA and stocks in a taxable account". There can be wide variations in tax-efficiency within stock and bond asset classes.
    • Select appropriate investment options. Minimize individual securities. Mutual funds and ETFs are much more diversified. Select investments that represent their respective asset classes well. Preferred investments are passive (index funds), very low cost, and have a large number of holdings.

    • Implement the portfolio in a cost- and tax-efficient manner. Keep transactions to a minimum (a good portfolio design should do that). Control the tax impact on sales of existing holdings that don’t fit into the client’s Target Portfolio.

  • (C)osts

    Cost containment is an essential element of successful investing. The lower your costs, the more return you get to keep. Commissions, advisory fees, expense ratios, transaction fees, and bid-ask spreads can all add up to some serious money.

    • Avoid commission products. Commissions are expensive, ripe with conflicts of interest, and completely unnecessary in today’s market. There is an abundance of non-commission investment options.

    • Advisory fees must be competitive and add value. There is a cost to electing investment management services. Big name advisory firms and those that outsource investment management tend to be the most expensive. You must receive value in some manner (potential increased returns, potential tax savings, convenience, time savings, less worry, etc.) or it is not worth the cost.
    • Use funds with low expense ratios. Expense ratios cannot be avoided, so they should be minimized. There are plenty of great investment options with very low expense ratios.

    • Minimize transaction fees. Make trades when necessary, but avoid frequent trading. Use ETFs without transaction fees (available at some discount brokers). For those who are contributing regularly to their accounts, establish automatic purchases which also avoid transaction costs.
    • Avoid higher bid-ask spreads. Use well-known ETFs that have a higher trading volume to minimize the difference between the buy price and the sales price. Avoid trading within the first 30 minutes of the market opening.


  • (I)nflows

    Consistent savings into your portfolio has many benefits. Regular inflows can help you reach your financial goals faster, and help your portfolio stay balanced, reduce its risk, and lower transaction costs.

    • Use the power of time and savings. With the "Rule of 72" you divide the expected rate of return into 72 to see how long it'll take for an investment to double (72/8% = 9 years). The "Rule of 72 + You" adds your savings to the equation and demonstrates how you can accelerate these results.

    • Use ongoing contributions to maintain your portfolio's balance. Just like an old-fashioned lawn sprinkler needs to be moved around to prevent over-watering, ongoing savings work the same way. Periodically review what investments are being bought and if any changes need to take place so certain assets don’t get over-weighted. This can help keep the portfolio rebalanced and reduce transactions (and costs and taxes).
    • Shift your asset allocation with ongoing contributions. Similar to above, but ongoing savings are used to slowly move a portfolio to a more conservative allocation (i.e. move from a 60% stock portfolio to one with 55% stocks. Dividend reinvestments can be used the same way as technically they are contributions too.

    • Avoid dollar-cost averaging into ETFs and mutual funds if you're going to be hit with transaction charges. Most low-cost, no-load mutual funds and ETFs trade with a transaction fee at discount brokerages. If you need to add to a fund like this, save up 4-6 month’s worth of contributions before a purchase in order to minimize transaction charges.
    • Larger windfalls should be handled according to your comfort level. Some people may prefer to just deposit the whole amount while others may want to utilize periodic purchases to ease into the market. Lump sums usually perform better, but dollar-cost averaging tends to avoid bad timing. Comfort is key.

  • (O)utflows

    Just like with inflows, outflows provide opportunities to rebalance and manage the portfolio. However, if you're taking distributions, you are likely retired, and the bigger concern is how to create adequate and sustainable income for the rest of your life.

    • Retirement income planning is unique for each person. Rules of thumb may work in other areas of financial planning and investing, but not with retirement income. Financial goals, assets, income needs, ages, and life expectancies all play out differently for people. The retirement plan should drive the investment decisions.

    • Have a withdrawal plan. Withdrawals should not be random, they should be part of an overall plan. We use what’s called a “Portfolio Income Buffer”, to 1) provide for a smooth and predictable income stream, 2) insulate the cash flow from market volatility, 3) shield the portfolio from untimely cash needs, 4) opportunistically replenish cash and rebalance the portfolio, and 5) provide for tax flexibility. A Portfolio Income Buffer is really a fancy way of saying a CD and bond ladder (fixed-income investments that mature at various dates).
    • Withdrawal rates are not static. Withdrawal rates have to respond to market conditions and the health of the retirement plan. If the plan is going well, more withdrawals may be OK. However, withdrawals may need to be lowered if it is not. Age also plays a factor in appropriate withdrawal rates.

    • Don't overlook the option of annuitization. Some people are dead-set against annuities or not aware of what's available. For the most part, that's fine. Variable and fixed annuities usually don't make a lot of sense. However, annuitization (turning a portion of your assets into a lifetime stream of income – like a pension) should at least be considered, especially for very risk-averse investors.
    • Distributions allow for portfolio rebalancing. Usually our Portfolio Income Buffer is designed to provide the needed cash for regular retirement withdrawals. However, if there is an unplanned need whether for a retiree or an accumulator, sales may be needed to free up the cash. Review the portfolio's asset allocation. Investments that are over-weighted could be trimmed back for cash. This gives you the added benefit of rebalancing the portfolio.

    • Consider taxes. Sales in taxable accounts may create taxable gains. Review accounts for offsetting losses. Distributions from tax-deferred accounts are taxed as ordinary income. Taxes need to be considered and accounted for on all withdraws.

  • (N)erves

    The last, and probably most difficult step of a successful investment plan is to control your nerves. You can't control the direction of the market, but you can control how you react to it. Your behavior can dramatically affect your investment results.

    • Don't be fearful. Fear decreases returns. Too many people move out of stocks after they've gone down. Sitting in cash or an ultra-conservative portfolio "until things look better" practically guarantees missing out on the returns of a market turnaround. Investing is a long-term endeavor. Take tax losses in down years to set up "free" capital gains in good years.

    • Don't be greedy. Greed increases losses. Too many people throw caution to the wind after the market has gone up. Abandoning your diversified target allocation in favor of more stocks or a "hot" investment is a recipe for magnified losses. Enjoy your gains by taking some off the table (i.e. rebalancing).
    • Don't be naive. There is no such thing as a no-risk, high-return investment. If it sounds too good to be true, it is. If you're unsure about an investment, seek a 2nd or 3rd opinion.

    • Relax. There are no guarantees; but take comfort in the fact that your portfolio is engineered using a professional, well-researched investment approach.
    • Recognize your biases. Investing is more of a mental game than anything else. In fact, a relatively new field has emerged that is devoted to the mental challenges of investing — Behavioral Finance.