In this fun, informative 3-part video series, Mike McCann explains our approach to portfolio management with a broader perspective: how and why we use asset allocation to create diversified portfolios, update our list of funds quarterly, and review client portfolios monthly to rebalance if needed. Click here if you prefer to read the video transcripts.
Part 1: Creating the Right Mix of Investments
Understanding asset allocation, diversification and individual client risk tolerance (approx. 3 minutes).
Part 2: Fine-Tuning Our List of Funds
Conducting quarterly analysis of investment options (approx. 2 minutes).
Part 3: Adjusting the Sails
Performing monthly client portfolio reviews (approx. 3 minutes).
Video Transcripts: Portfolio Management with a Broader Perspective
Part 1: Creating the Right Mix of Investments – understanding asset allocation, diversification and individual client risk tolerance
I’m Mike McCann, president and founder of Perspective Financial Services. In this 3-part video series, I’m going to lay out in simple terms our firm’s portfolio management process. How and why we create diversified, balanced investment portfolios for our clients that take into account their individual goals and tolerance for risk.
First, let’s talk about creating the right mix of investments.
There’s a lot of financial jargon used in the media, and the terms asset allocation and diversification are especially popular among the financial lexicon. These are important, and distinct, concepts when managing risk in your investment portfolio. So what do they mean?
Asset allocation is deciding how much you want to invest in different asset classes, such as stocks, bonds and cash. Over time, this mix of investments will be your road map as financial markets move.
Different asset classes yield returns at different speeds and have different levels of risk. Therefore, diversification means more than simply dispersing one’s eggs into many baskets. The goal is to balance risk and return within a portfolio of investments.
That means dividing your investment dollars into a variety of asset classes across many industries, geographies and sizes of companies.
Within these broad investment categories, non-traditional asset classes – such as real estate investment trusts (REITs), commodities (such as energy, agriculture or precious metals) and international bonds – can provide further diversification and potentially lower investment risk.
Recurring bumps in the financial markets, often called volatility or corrections, can create anxiety and cause investors to question if a change in their investment strategy is needed.
At Perspective Financial Services, we apply time-tested asset allocation and diversification principles to balance portfolio risk and return. That way fluctuations in the markets have less impact on your investments overall. It’s like having shock-absorbers on your portfolio. The bumps in the road are less noticeable, allowing you to focus on where you’re headed rather than the occasional obstacles that need to be navigated.
While fine-tuning and adjustments are sometimes necessary to account for current events, the fundamental principles of asset allocation and diversification remain the best ways to manage risk.
Creating the appropriate mix of asset classes in your portfolio begins with understanding your feelings about risk and knowing how long you plan to keep your money in the market. An investor with a long time horizon and a high risk tolerance, for example, might have as much as 90 percent of a portfolio in stocks with 10 percent in cash; a conservative investor might hold 20 percent stocks and 80 percent bonds and cash; and a moderate investor would fall somewhere in-between.
Maintaining regular communication with your financial planner and having candid conversations will help you both understand your tolerance for risk and enable you to create an appropriate asset allocation for your investment portfolio.
In parts 2 and 3 of this series, I’ll talk about our firm’s process for monthly and quarterly review and analysis of your investments and how we keep client portfolios in balance.
Portfolio Management with a Broader Perspective
Part 2: Fine-Tuning Our List of Funds – conducting quarterly analysis of investment options
I’m Mike McCann, president and founder of Perspective Financial Services. In this 3-part video series, I lay out in simple terms how and why our firm creates diversified, balanced investment portfolios for our clients.
In Part 1, I talked about creating the right mix of investments that takes into account each investor’s unique goals and risk tolerance.
Now, let’s talk about a critical aspect of our firm’s strategic investment process – what goes on behind the scenes.
The Perspective Investment Committee meets every quarter to review and fine-tune the list of funds we use to build balanced client portfolios.
Funds are selected based on several criteria and must pass a series of “cuts” to make the list. Considerations include factors such as cost and the fund manager’s tenure, as well as overall performance and risk vs. return (both of which we compare to peer funds and other benchmarks).
The process begins when Perspective’s Portfolio Administrator conducts preliminary research and narrows the field of funds for consideration to about 30 in each category (from a universe of several thousand choices). Perspective uses two advanced industry software programs to analyze thousands of funds. We also tap into our custodian’s institutional website, to which individual clients do not have access, and obtain additional fund data.
Funds already on our list are reviewed for any changes, such as new management, increases or decreases in returns, or changes in expenses or risk. Funds that no longer meet our strict criteria are removed from the list. Likewise, new funds are discussed and, when appropriate, added to Perspective’s list of approved investments.
With our updated fund list in hand, our team of advisors reviews and updates their client portfolios.
In Part 3 of this video series, I explain our monthly client portfolio review and rebalancing process.
This is just one element of Perspective’s broad range of expertise and services. To learn more, watch our other videos at MoneyAZ.com, or give us a call.
Portfolio Management with a Broader Perspective
Part 3: Adjusting the Sails – performing monthly client portfolio reviews
I’m Mike McCann, president and founder of Perspective Financial Services. In parts 1 and 2 of this video series, I talked about why and how our firm creates diversified, balanced investment portfolios for our clients that take into account their individual goals and tolerance for risk.
In this final installment, I’ll address the importance of monthly portfolio review and occasional rebalancing.
Choosing investments and creating an appropriate mix is only the beginning when it comes to managing a portfolio. The financial markets are changing all the time. This fluctuation in performance alters the values of the different asset classes in a strategically diversified portfolio. Thus, as the wind inevitably will blow, it’s important to adjust the sails of your portfolio from time to time through rebalancing. This involves reviewing the portfolio and buying or selling assets to maintain the original, desired level of asset allocation.
William Arthur Ward said, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.”
How often should you review and rebalance a portfolio to achieve and maintain this efficiency? There is no official rule or industry standard that determines when or how often a rebalance is required. Some advisors believe an annual review is sufficient. Others review quarterly. At Perspective Financial Services, we review client portfolios monthly.
While a rebalance may not always be necessary, we believe consistent, frequent review is a key to long-term success.
Your portfolio’s overall progress should be enough to support and achieve the financial goals you’ve set. The objective is to see steadily increasing value of the portfolio, even if one or more of the investments may have lost value. The proven method of achieving this objective is not to complain about market fluctuations or to hope the markets will calm. It’s to keep an eye on the horizon and adjust the sails when needed.
For the sake of example, let’s say your optimal portfolio requires an even mix of large-cap and international stocks. Now consider a major market shift in which large-cap stocks soar and international stocks drop. This alters the mix of investments in your portfolio, which means it’s time to rebalance to help ensure the optimal asset allocation.
We maintain balance in a number of ways. One approach might be to direct future investment funds into the underrepresented category, international stocks in this example. We also might sell some of the largely appreciated assets and redirect the dollars from those sales to the purchase of undervalued stocks.
This keeps your portfolio in balance, while maximizing growth potential for the money you invest.
Maintaining the appropriate asset allocation is a critical key to staying on track with your long-term financial goals.
Portfolio management is just one element of Perspective’s broad range of expertise and services. To learn more, watch our other videos at MoneyAZ.com, or give us a call.