Source:  Ibbotson Salesbuilde^TM Presentations, 1999 Ibbotson Associates Inc.

Asset Location

Many advisors implement the same asset allocation in every client account. This is easy for the advisor, but not in your best interest if you have a mix of taxable and tax deferred accounts or assets in a 401(k) plan with limited investment choice. Instead, we select the best location for each asset class based on tax considerations and account constraints.

Stocks tend to be more tax efficient than cash or bonds, because they generally make fewer distributions; and, when there are distributions, they are often at lower tax rates than income from cash or bonds. To the extent possible, we place tax-efficient investments in taxable accounts, and tax-inefficient investments in tax-deferred accounts. We place the highest growth assets in Roth accounts, since they will not be taxed.

In order to provide a tax-efficient solution, we prefer to advise clients on all of their investment accounts, including 401(k) and other employer-sponsored retirement plans. Because each client has a unique mix of taxable and tax-deferred accounts, we develop a highly customized solution for structuring your portfolio.

Investment Manager Selection

The last step is selecting an investment manager for each asset class or sub-class. We generally use mutual funds and exchange traded funds (ETFs) to provide diversification at a low cost but may use separate accounts in large taxable accounts or unique situations. We do not limit our advice to investments held at our custodian and may select among the best investment options within your 401(k) or employer-sponsored retirement plan.

We use Dimensional Funds for the majority of the equity allocation in client portfolios.  Dimensional Funds provide broad diversification at a low cost but tilt towards factors that have been proven by research to outperform across all markets:  value, size, and profitability.  They are suitable for taxable accounts since they are tax efficient and managed based on quantitative factors supported by research, rather than the strategy of an individual manager.  Dimensional Funds are only available through selected advisors, and we are pleased to be able to offer them to our clients.

We may use actively managed funds in tax deferred accounts, particularly for the bond allocation and less efficient asset classes such as emerging markets.  When selecting among actively managed funds, we look for funds with clearly defined strategies and long-term track records of outperforming the market when taking investment risk, management fees, and transaction costs into consideration. We prefer funds with a multi-manager approach, which we believe is more likely to stand the test of time.

We may use passive funds, also known as index funds or ETFs, when a retirement plan does not have good actively managed options for a particular asset class.

Portfolio Monitoring

Unlike investment reports that simply show portfolio value and return, our performance reports dissect your portfolio and show how it has performed in light of its risk profile and recent market trends. Although a 10% return may sound wonderful, it might represent poor performance for an aggressive portfolio during a period of strong market performance. On the other hand, a 1% return could represent stellar performance for a conservative portfolio or a period of weak market performance.

Each quarter we review the performance of all asset classes and compare each client’s portfolio performance to an appropriate benchmark that is constructed based on the portfolio’s unique asset allocation. We analyze the composition of your portfolio in depth to identify the underlying drivers of performance, such as asset allocation drifts, sector concentrations, regional exposure, or security-level bets. We then dive down further to compare the performance of every investment manager to its peers and relevant benchmarks.

Strategic asset allocation is not a pure buy-and-hold strategy. When your asset allocation deviates significantly from the target, we provide detailed recommendations for re-balancing. We consider the tax consequences and transaction costs and attempt to re-balance within tax-deferred accounts or use cash flows whenever possible. Because we manage portfolios, rather than accounts in isolation, our clients rarely, if ever, pay taxes to rebalance a portfolio.

We regularly review taxable accounts for opportunities to harvest capital losses.  Temporarily replacing funds with losses can offset the capital gains in other funds, delivering tax savings to the client.

In many cases, we recommend regular investment plans where clients invest a fixed dollar amount into each asset class at regular time intervals. Referred to as “dollar-cost averaging,” this systematic approach helps investors manage cash flow and reduces the risk of potentially investing at an inopportune time. The approach also takes advantage of price fluctuations by purchasing more of asset classes that are temporarily priced low, while purchasing less of asset classes that are priced high. We provide detailed recommendations for allocating contributions in a manner that is consistent with the client’s asset allocation strategy.

Our trading recommendations do not attempt to time the market or identify the next big thing. In fact, studies have provided limited support for “market timing” in efficient markets, especially when transaction costs are considered. Instead, we take a structured approach to provide the long-term discipline required to achieve your goals despite the inevitable ups and downs in the market.