|
If a financial advisor can’t “beat the market,” what real value are they providing?
Some investors believe it is their advisors’ job to make them wealthy by beating the market. They envision their financial advisor pouring over stock reports, economic research and market analysis in an attempt to outsmart everyone else. But does any of that effort make a positive difference for the clients?
The truth is, experienced financial advisors (including those with superior knowledge, market experience, and analytical ability) are not trying to beat the market. Experienced financial advisors help clients achieve their financial goals by designing and overseeing a disciplined strategy that reflects not only the client’s return needs, but risk tolerance, priorities and time horizons. Trying to achieve increasingly higher returns by taking on additional risk is rarely in the clients’ best interest.
Science & Art
Designing and maintaining a customized portfolio to meet a client’s specific goals, risk tolerance and time horizon is an important part of a financial advisor’s job and represents a real and valuable service. This is the science of money management. In the short run, helping a client stay on course during periods of irrational exuberance or paralyzing fear is another matter. This is the art of money management.
Understanding Your Needs
The focus of our practice is on the long-term management of your financial needs, finding solutions to problems, and enhancing your lifestyle - not on short-term securities trading. Our investment philosophy is based on achievement of your goals, with as little risk as possible.
Determining Your Risk Profile
One of the first steps in developing an investment plan is to determine your risk profile as an investor. It can depend on the goals you are investing toward, your time frame, your current financial circumstances, as well as your personality in making investment decisions. Some investor’s personalities are simply geared toward lesser or greater risk taking. The larger your income and asset base, the more risk you may be willing to take, at least for some subset of your investments, because you have a greater ability to recover from investments that may not perform as expected. Conversely, you may feel more comfortable with a conservative approach, knowing you do not need to take on additional risk in order to meet your goals.
Choosing a Model Portfolio
Examination of the historical performance of asset classes clearly demonstrates that the relative risk of those asset classes –small-company growth stocks, large-company value stocks, municipal bonds, commodities, etc. – changes over different time horizons. As a result, the appropriate asset allocation for a 30-year goal is very different from that of a 5-year goal. In addition, a portfolio built for long-term growth is very different than a portfolio built for generating steady income.
Our approach to investment strategy recognizes that over 90% of a portfolio’s performance is determined by the allocation of assets among broad asset classes, rather than individual security selection or market timing. In keeping with this we have adopted five customized, model portfolios that generally coincide with the ways in which investors characterize themselves, their objectives, and their feelings about risk. Each model has its own asset allocation, associated risk level, and return potential.
Ongoing Portfolio Management
Choosing the appropriate model is just the first step in building an investment portfolio. Once a model portfolio is selected, a management approach will be chosen and appropriate securities will be selected. Our objective is not to scrap your current portfolio and build a new one, but to work with the assets you currently have, moving incrementally over time toward the model that best suits your goals. We continue to work with you on an ongoing basis to manage your portfolio over time, making adjustments as needed. Techniques that are used include rebalancing, migration, and repositioning. New investment strategies are introduced to the appropriate clients at the appropriate time.
|