Investment Philosophy
What a difference four and a half decades make to portfolio construction.
When I began my career, investors could only create an investment portfolio by purchasing individual stocks and bonds. There were no index funds and very few mutual funds. You simply tried to identify the best value (with limited research resources) and hope that you got it right.
By the mid 1980s one could purchase the S&P 500 index as a listed security and thereby create a diversified equity portfolio. Today, the opportunities to build a balanced portfolio are almost infinite. Research is a click away for both the professional portfolio manager and the self directed investor. Opportunities abound for the experienced and thoughtful investor.
Over my forty-five years of managing private client portfolios I have reviewed and experienced many courses of action:
Does one hire a really good stock picker and bond manager and leave the management up to them?
How do I know if they possess skill, or did luck drive their returns?
Is excessive, non identified risk being taken
If I self direct my portfolio how do I measure my own skills?
These questions and their answers make up the core of my investment philosophy.
In a nutshell I seek to, “maximize my returns while minimizing risks”. Easy to say, but hard to deliver.
The Basic Foundation from which to build one’s portfolio:
Define a rate of return that you seek to achieve over a five year time horizon. This return is to be realized through dividends / interest received and capital gains generated. Rather than a specific investment return I use a range of returns. For my own portfolio I seek to achieve an annual, pre tax, compound return of 5% to 7%. As both the stock and bond markets are volatile, returns will be lumpy.
Design a portfolio that is likely to stay within your comfort zone during market selloffs. Equity markets typically experience corrections (on average) of 15% every three years, with corrections of 25% occurring historically every seven years. In the future we may experience more frequent bear markets of this magnitude. There is no way to avoid these corrections that “drawdown” the value of your portfolio. By establishing a portfolio mix of cash, fixed income (public and private) and equity, the investor can estimate what the drawdown dollar amount will reach in typical setbacks. For my own portfolio, a drawdown of 12% to 14% is painful but a realistic threshold
The 100 Day Max Drawdown Chart (as shown below) provides a strong visual record of historical market corrections for the S&P 500 index
Be the index. In both my equity and fixed income allocation I weight heavily broad market indexes. This eliminates the requirement to identify stocks or bonds that will outperform, as many indexes weight their portfolios by market capitalization (stocks that do well increase in portfolio weight, poorly performing stocks see a reduced weight)
Place a strong focus on tax efficiency. Where possible I hold fixed income in non taxable accounts. Indexes that have very low turnover also allow for possible long term capital gains deferral
Include private debt as a portion of the fixed income allocation. Superior yields, low volatility are hallmarks of the best private debt offerings. There is capital risk in private debt so I regard these investments as having the same capital risk as equities. Ensure that the combined weight of equity and private debt do not exceed one's risk tolerance.
