Investment Advice

We often ask, “Would you rather be an owner or a loaner?” While there is no right answer to this question, stocks offer superior long-term growth potential, while bonds offer more stability. It is also true that owners take greater risk than loaners. Naturally, we expect to be rewarded for being a partial owner of a diverse portfolio of companies.

Although it may bring up emotions or feel unpleasant, the bounciness of stocks is the very reason stocks produce higher returns than bonds. Volatility is of greatest concern to those who will have to liquidate their investments in a short time horizon. However, for long-term investment horizons, wise investors seek a high rate of return on long-term money.

That said, there is often a place for both stocks and bonds in a prudently designed portfolio. In a strongly rising stock market, some investors are tempted to move to an all-stock portfolio to chase those gains. However, such a move can result in dramatic swings in the portfolio’s value, and may leave the portfolio vulnerable to a substantial drop in value once the market reverses. Your wealth manager will help you find the right mix for your unique situation.

Roger G. Ibbotson and Rex Sinquefield, Stocks, Bonds, Bills, and Inflation. Dow Jones Irwin, Homewood, IL. 1988. Updated annually by Ibbotson Associates. See also U.S. Inflation Calculator for a quick and easy way to get the same information: http://www.usinflationcalculator.com/

We manage risk by diversifying within U.S. and international equity markets. We look for investments that zig while others zag; if all the investments have a long-term, high rate of return, then a portfolio’s overall bounciness is less than any single investment and delivers a comparable long-term rate of returns.

Correlation is the way two or more investments move together. The higher the correlation, the more these investments are likely to rise and fall together. The lower the correlation, the smoother the ride.

A common practice in the industry is to use Morningstar or other tools to diversify a portfolio, however, we are different. For more information about this, refer to the Academic Research at the end of the downloadable white paper.

Another common error is over-diversification: holding a large number of small investments, which does not reduce risk nor produce excess returns. Instead, we diversify by investment strategy, choosing concentrated portfolios, and remaining consistent. These concepts are also discussed under Academic Research in the downloadable white paper.

Periodically we rebalance the portfolio to make sure it maintains its strategic allocation. Certain conditions can make entire asset classes more or less risky. We assess the structural risk and make tactical adjustments to over- or under-weight assets. We may increase or decrease the weighting to an asset class by 1–20% after much thought and careful research.

In response to changing market conditions, we use investment models/strategies like Market Rotation and SBMA. These strategies potentially reduce risk and increase returns. In a down market, as much as 25% of the portfolio may be hedged, or placed in cash. We may give up a small amount of performance in exchange for downside protection. Refer to the Strategies section of the downloadable white paper for more information.

Investors often ask, “When is the right time to enter the market?” For a long-term investor, the answer is today. Even though there is always a possibility that the market will go down tomorrow, today is the right day to start investing.

A large portion of the long-term gain in investment in the stock market comes from sharp upward bursts. Just missing the best day out of each calendar year results in dramatically lower returns than staying invested throughout the period. A $10,000 investment in equities started on June 30, 1926 would have accumulated to $45,310,852 by December 31, 2017. If you missed the one best day each year your investment would have grown to $1,879,984.

Athena Invest, Behavioral Advisor, June 2016