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Asset Allocation Process
The first step in our Asset Allocation Process is to establish a strategic (long-term) asset allocation for each portfolio. We believe that at the core of building a diversified and efficient portfolio is Modern Portfolio Theory (MPT). According to the MPT, it’s possible to construct an “efficient frontier” of optimal portfolios offering the maximum possible expected return for a given level of risk. We utilize the expected return, correlations, and standard deviation of various asset classes to design the most efficient growth and income portfolio.
Three basic investment types
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- Cash or Cash Equivalents: For an investment to be classified as Cash or as Cash Equivalent, the savings are held as a cash balance in an account or it provides a high level of safety for the capital amount, pays a reasonable income while invested, and it can be sold easily at any time or the investment has a very short-term maturity. At maturity, the issuer guarantees to return the investor’s capital upon the maturity date.
- Fixed Income: For an investment to be categorized as Fixed Income, the investment should have a set maturity where the investor’s invested capital will be returned to them and the investments should have a set, regular annual income. The investment’s market value is typically influenced by the credit rating of the issuer, the current interest rate environment and the investment’s liquidity. Fixed Income investments do benefit from the issuer’s profitability or investor’s enthusiasm for the issuer’s industry or sector. In some cases, as with preferred shares, the investment may be missing a maturity date, but its individual features and the market’s valuation of the investment is closer aligned to a Fixed Income investment than it is to a Growth or Cash Equivalent investment. As a result, it is classified as Fixed Income for asset allocation purposes.
- Growth: For an investment to be categorized as Growth, the investment will not have a maturity date where the investor’s capital is returned to them. There is no issuer guarantees on the monies invested. The market value of the investment will fluctuate dependent upon the issuer’s profitability, the economic and investment environment and the popularity of the issuer’s industry with investors. The investment will not pay an enforceable income payment to the investor. The investment may or may not pay an annual income, but the payment is at the discretion of the issuer and, as such, the investment’s annual income payments can be increased or decreased at the issuer’s discretion.
