We are serious when it comes to investing your hard earned money. We use a defined process called the Investment Optimization Process™. This process helps people get the highest amount of return for a given level of risk. We ensure systematic, unemotional and lower volatility investing which translates into ongoing success for your investments.
The Benefits of the Investment Optimization Process
- Increased returns for a given level of risk
- Decreased volatility or short term fluctuations
- Increased likelihood of staying invested for the long-term
- Increased Peace of Mind
Click to view the Investment Optimization Process Diagram
Your Goals & Risk Tolerance
We start by defining and understanding your goals concerning the money that you are investing.
- What is the purpose of this money?
- When and on what will this money be spent?
- How much and when will you be adding to your account?
Next, we seek to understand your risk tolerance that includes both your ability and willingness to assume risk.
- How do you feel about this money?
- What type of past investment experience have you had?
- What are your expectations around returns?
- What amount of drop in your portfolio can you tolerate?
Our job is to:
- help you determine the level of risk (or amount of a drop) that you are willing to accept
- incorporate as much growth in your portfolio in order to maximize your return, but not put too much growth so that you’ll panic and sell when the markets drop
- provide you with a basic education of how different investments work along with the pros and cons of each investment
- make sure your long-term return expectations and short-term market volatility, tolerance, and expectations match up
Strategic Asset Allocation Decision
Once we understand your goals, time frame and risk tolerance then we determine your asset allocation (how much to hold in cash, bonds and stocks).
Did you know that:
- 91.5% of your portfolio variance is determined by your asset allocation (or how much you have in cash, bonds and stocks) and not which specific investments you hold.
- 4.6% of variance is due to security selection (which specific investment to buy)
- 1.8% of variance is due to market timing (when you buy and sell)
- Less than 2.1% is from other criteria
So if there were only one decision that you could get right, which one would it be?
If you answered Asset Allocation - then we are in agreement.
Now isn’t it interesting that our entire industry focuses on the least important decisions –which stock or mutual fund to buy and/or market timing (when to buy and sometimes when to sell), but very few even consider your overall asset allocation?
Geographic, Management Style and Market Capitalization Diversification
We now look at incorporating three further levels of diversification; geographic diversification, investment style diversification, and market capitalization.
- Geographic diversification involves splitting money between Canada and the rest of the world. Since Canada is less than 3% of the investment world, holding foreign investments, should increase the return and decrease the volatility in your portfolio.
- Management Style Diversification involves two main styles of value and growth. Both styles have done about the same over the long run; but the two styles tend to be negatively correlated, and in any given year, one style tends to outperform. By combining the two styles within your portfolio, it can help to decrease the volatility (or mood swings) in your portfolio as well as increase your peace of mind knowing that you always hold some investments in whichever style is outperforming.
- Market Capitalization involves having a mix of small, medium, and large cap stocks in the portfolio. Inclusion of small cap stocks will depend on your risk tolerance.
The Investment Plan
We document your goals, your target asset allocation and your geographic breakdown. We choose from a vast array of products and managers to meet your needs. We can provide alternatives, or simply our final recommendations. We choose managers with different investment styles, who have great long-term performance and who stick to their investment style. We also look at costs, company stability, product offerings, and tax efficiency. We provide you with written recommendations, which are personalized for your situation and are based on what we would do, if we were in your exact situation.
Implementation and Manager Monitoring
We implement your portfolio. A plan without action and a deadline is simply a dream. To achieve your investment goals, we need to take action.
Picking your elite managers is just the beginning. We constantly evaluate the managers’ performance relative to their peer group (comparing value-to-value, growth-to-growth, and asset class-to-asset class). We don’t fire managers because of one bad quarter or even one bad year, since last year’s star is often not repeated, but we will watch them and recommend changes where appropriate.
Review and Rebalancing
Lastly, we review and rebalance the portfolio to the target asset allocation. By rebalancing, we sell the asset classes that have done well, and shift money to the asset classes that haven’t done as well. Many people will recognize this as selling high and buying low. We’ve all heard that it’s a great strategy, but in reality it’s counter intuitive and very difficult to do. Who wants to sell their investments that are doing well and replace them with investments that are doing less well? Unless you have a predetermined asset allocation and rules for rebalancing, the rebalancing will never happen. Yet this is precisely the strategy that the very wealthy use to maintain their wealth.
Rebalancing can be generated based on an imbalance in asset classes (cash, bonds, stocks), geographical weightings (Canadian, US and International) or style (value and growth).
Rebalancing removes emotion and avoids the temptation to change your portfolio based on market predictions or market timing (strategies that are proven not to work but very tempting the more you listen to the media and your emotions!)
Rebalancing may also be necessary if there is a major change in your personal or financial situation. It is done most efficiently through new contributions.
By rebalancing to your target asset allocation, you can significantly decrease volatility (or mood swings) with little or no impact on your returns.
To be effective this investment process needs to go full circle and be dynamic. Just as you and your needs change, different assets grow at different rates and managers can change strategies or companies. This is an ongoing process and we are here to guide you.
Do you know what your target asset allocation is or what your current asset allocation is? Does your investment professional? What process are you using? Do you rebalance your portfolio? Please call us if you have questions or if you’d like to know if you qualify for this service?