Your portfolio’s design is a reflection of your investment philosophy. Before you can begin to craft your portfolio, you must have clear investment goals and objectives. You must also have completed your investment policy statement, defining how you plan to identify and select the investments in your portfolio, as well as the actions you intend to take to achieve your required rate of return.
Two general investment strategies can be used:
1. Strategic decisions contemplate the investor’s investment horizon, risk profile, required returns and cash flow needs, available assets, tax brackets, inflation rates, and the average returns of different asset classes.
2. Tactical decisions are made by investors who believe one asset class will perform better than another, such as expecting stocks to outperform bonds, or international equities to outperform domestic equities.
Together, strategic and tactical decisions will result in a mix, or a weighting, of asset classes that are believed to maximize returns for the investor’s acceptable level of risk. These asset classes are also sector-weighted against an index that will be used to measure the portfolio’s performance, and/or with a bias toward a sector expected to outperform other sectors.
When examining securities, investors try to identify securities that appear to be mispriced. There are many methods for gauging the desirability of the security, but all these methods fall into one of two main classifications: technical analysis, and fundamental analysis.
Technical analysis involves the study of a security’s prices in an attempt to predict future value. Past prices are examined to identify recurring trends or patterns in price movements. Then, knowing the history of the price movements, recent prices are analyzed to identify emerging trends or patterns similar to past ones. This matching of current trends or patterns with previous ones is done with the conviction that these trends or patterns repeat, and thus results may be predictable and helpful with limiting risk.
Fundamental analysis asserts that the true value, or intrinsic value, of a financial asset equals the present value of all cash flows the asset owner expects to receive. The fundamental analyst attempts to forecast the timing and size of these cash flows, and convert them to their equivalent present value using a discount factor and dividend discount model. Once the true value of the asset has been determined, it is compared to the current market price to see if the asset is fairly priced or not.
Assets valued at less than their current market price are considered overpriced, while those with the true value greater than their current market price are considered underpriced. If an asset is overpriced, investors must determine if they are willing to pay the higher price, or wait for the asset to fall closer to its true value for purchasing. If underpriced. The asset may be a good investment, pending additional analysis.
At Synergy Financial Management, we employ four investment strategies which are unique to our firm; we work closely with each investor, selecting a proportionate combination of the four that best serves our individual client’s unique interests. Discussion with our client establishes the best combination of these four strategies, whether Active Strategy, Semi-Passive Strategy, Conservative Strategy, or the Alternative Investment Strategy.
We’ll discuss each of these more formally in our next articles, but for now it’s important to remember the following:
1. Technical analysis focuses on prices and patterns to predict future value.
2. Fundamental analysis focuses on aspects of the economy and industry conditions to determine an asset’s value.
3. Whenever you are preparing to invest, you must consider your time horizon, whether it is short term, medium, or long-term.
4. Always calculate the effect of taxes on your investment decisions before you invest.
5. Determine if the intended investment is sufficiently liquid or not. If you want to convert your assets into cash, is the penalty too high?
6. Also consider if you need the advice of an attorney because of any potential legal or regulatory constraints.
7. Be sure you understand the cost of management or participation fees that make the value of your investment questionable.
8. Reflect on whether or not the investment fits with your Investment Policy Statement and your intentions for being diversified in specific asset classes.
9. Decide if the investment increases or reduces your portfolio’s level of risk.
10. Make sure the intended investment presents a good opportunity for the attainment of your required rate of return.
We hope this article about crafting your portfolio gave you some insights on how to proceed or how to evaluate your portfolio’s current performance. As your professional financial advisor, Synergy Financial Management can help you analyze risk before adding assets to your portfolio and can guide you with diversifying your vulnerability to risk. We enjoy working with you to maximize your portfolio’s rate of return while minimizing your exposure.
Please give us a call so we can discuss how our services can help you accelerate your growth while securing your wealth.
Joseph M. Maas, CFA, CVA, ABAR, CM&AA, CFP®, ChFC, CLU®, MSFS, CCIM
Synergy Financial Management, LLC
13231 SE 36th Street, Suite 215
Bellevue, WA 98006