Volume 12: 2nd Quarter 2010
Investing for Growth
The Modern Portfolio Theory
The concerns we most frequently hear from our clients are, “Am I saving enough for retirement?”, and, “Will I be able to maintain my lifestyle during that time period?”. As they amass assets and grow older, clients are also concerned with protecting what they have, while still investing for growth.
Medical advances and lifestyle changes involving diet and excercise mean we are living longer than previous generations. The issue is no longer simply reaching retirement, but rather, living 20 to 30 years beyond.
The question, and challenge, then becomes, “How does a long-term moderate investor achieve growth, while keeping in mind the importance of capital preservation?”.
First Republic recommends a well-diversified portfolio, which stresses the importance of asset allocation, when designing a client’s investment strategy. A portfolio might include allocations to equities, fixed income, and possibly some level of alternatives. Each asset class is further sub-divided to maximize opportunities within their respective segment.
This strategy is a product of Modern Portfolio Theory, initially developed during the 1950s, and popularized over the last few decades. Prior to the implementation of this theory, financial advisors took a scattershot approach to answering the question posed above. These “stock pickers” would invest a client in a number of well-known American names, maybe a well-known international name, but never an emerging market stock, and only by chance a mid- or small-cap name. As a result, clients ended up with a portfolio comprised solely of large-cap value and large-cap core stocks. Occasionally, a few bonds would be included.
The recent financial crisis devastated undiversified or overly concentrated portfolios (all eggs in one basket approach). Almost all sectors of the market were deeply affected, with the S&P 500 down almost 40% in 2008. Despite this fact, clients with clearly-defined investment plans and well-crafted portfolios, who stayed in the market during that time period, generally out-performed the broad market. This reiterates the importance of constructing a well-diversified portfolio with an eye to upside potential, yet downside protection.
So how is this done?
The opportunity to design a portfolio with diversification in mind, for both small and large investors, can be met with mutual funds and ETFs. This is particularly advantageous to the smaller investor, who otherwise wouldn’t have the opportunity to access professional portfolio management.
In addition to providing the road map for clients, we also provide the means to assemble the portfolio, avoiding the commissions and expenses of purchasing mutual funds and/or ETFs individually by charging a flat quarterly fee. Clients are invested in A-class shares of mutual funds and incur no further charges if changes are made to their allocation (i.e. percentage change) or to funds in their portfolio during the quarter. All research and advisory-related expenses are included.
How does a client invest for growth, and protect their assets from debilitating downswings? By focusing on the importance of asset allocation and working with their advisor to create a well-diversified portfolio. This is a long-term retirement plan.
DISCLAIMER: Disclaimer/Disclosure First Republic Private Wealth Management encompasses First Republic Investment Management ("FRIM"), First Republic Wealth Advisors ("FRWA"), First Republic Trust Company ("FRTC") and First Republic Securities Company, LLC ("FRSC"), Member FINRA/SIPC. FRIM, FRSC and FRTC are a wholly-owned subsidiaries of Bank of America N.A. FRIM is a SEC Registered Investment Advisor. This document is for information purposes only and is not intended as an offer or solicitation, or as the basis for any contract to purchase or sell any security, or other instrument, or to enter into or arrange any type of transaction as a consequence of any information contained herein. All analyses and projections depicted herein are for illustration only, and are not intended to be representations of performance or expected results. The results achieved by individual clients will vary and will depend on a number of factors including prevailing dividend yields, market liquidity, interest rate levels, market volatilities, and the client's expressed return and risk parameters at the time the service is initiated and during the term. Past performance is not a guarantee of future results. Investors should seek financial advice regarding the appropriateness of investing in any securities, other investment or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Although information in this document has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness, and it should not be relied upon as such. This document may not be reproduced or circulated without our written authority. The investment services and products mentioned in this document may often have tax consequences; therefore, it is important to bear in mind that FRIM does not provide tax advice. The levels and bases of taxation can change. Investors' tax affairs are their own responsibility and investors should consult their own attorneys or other tax advisors in order to understand the tax consequences of any products and services mentioned in this document. Products and/or services offered by First Republic Securities Company, LLC, and First Republic Investment Management are not deposits or obligations of, or insured, guaranteed or endorsed by any bank, Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency, entity or person. The purchase of securities involves investment risks including the possible loss of principal.