We start your portfolio design with an understanding of you. Some of the questions may be:
- What are your goals? (to retire at age 63 with $120,000 of retirement income, etc.)
- What will you need to accomplish your goals? (taking into account social security and/or other retirement income, what size portfolio would give you a high degree of successfully achieving your goals?)
- How will we attain the needed portfolio? (how much do you plan on saving, and how much do we need the portfolio to grow?)
- Are you comfortable with the level of stocks needed to grow your portfolio, or for retirees - support your withdrawal needs? (are you comfortable having 60% in stocks, etc.)
- What concerns do you have? (escalating medical costs, etc.)
From here we choose one of our Base portfolios. These are portfolios we’ve built that range from 20% stocks to 100% stocks in increments of 5%. These are not the model portfolios that we disparaged in our Investment Introduction. This is just our starting point.
Our Base Portfolios fully implement our “Control your ACTIONs” philosophy.
- Asset Allocation: The portfolio allocation is extremely diversified and utilizes the advantages of various major factors (Stock, Size, Value, Quality) in its design.
- Cost: We use low-cost investment options, both from an expense ratio standpoint and from a trading standpoint. We have access to over 550 ETFs without transaction charges.
- Taxes: Considers asset location for current and future tax impact.
- Inflows: Contributions are used to help keep portfolio balanced.
- Outflows: Planned withdrawals incorporates our Portfolio Income Buffer, along with rebalancing and tax management.
- Nerves: While there are no guarantees, the portfolio is designed using many best practices.
This results in a low-cost and tax-efficient, globally diversified, factor-capturing base portfolio. Some clients will stop here as they do not prefer any customization.
For those that do prefer customization, we have a lot of options. These do not change the stock percentage of the overall allocation, rather it tilts the portfolio towards a more aggressive, defensive, and/or income-oriented stance. It also takes into account any limitations or personal preferences you may have.
- Asset Class Adjustments: We can over-weight or under-weight certain asset classes to be more aggressive.
- Factor Heavy: Similar to above, but the factors like Size, Value and Quality are over-weighted
- Thematic Investments*: funds invest in themes like robotics, biotech, clean energy, etc. They are usually worked in alongside traditional growth funds.
- Frontier Markets: These are international markets less developed than Emerging Markets, like Argentina and Estonia.
- Lower Credit Quality Bonds: We can reduce the credit quality of investment grade bonds and /or include more high yield bonds into the portfolio.
- Asset Class Adjustments: We can over-weight or under-weight certain asset classes to be more defensive.
- Defensive Sectors: Defensive stocks like utilities, consumer staples, and health care tend to perform better in a declining market.
- Low-Volatility Funds*: These funds try to match market performance but with less volatility. They have exposure to the broad market but often over-weight defensive sectors.
- Dividend Focused Funds*: Dividend paying companies tend to be more established and in theory should be able to weather bad market conditions better than less established companies.
- Defined Outcome Funds: These funds try to provide a defined range of returns. The fund may limit your upside to 10% but also absorb the first 15% of losses. They can be a decent option for risk averse investors, because it still gives you some upside.
- Covered Call Funds: These funds sell call options (the right to buy) for a premium. The premiums can help offset market losses.
- Hedging Strategies: These are often stop orders designed to stop an investor’s loss on a certain ETF, but can also include market hedging funds that perform the reverse of a certain index like the S&P 500.
- Bond Strategies: These are usually used to diminish the risk of rising interest rates. They include reducing the duration of bonds funds and using individual bonds and target maturity bond funds.
- Asset Class Adjustments*: We can over-weight certain asset classes to generate more income.
- Dividend Focused Funds*: Already discussed in the Defensive section, these funds can provide more income due to their focus on higher dividend paying stocks.
- Covered Call Funds: Also discussed in the Defensive section, these funds can generate income from the premiums they collect.
- Closed-End Funds: Due to their structure, they tend to offer higher dividend yields
- Portfolio Income Buffer*: Primarily used for retirees who are taking regular withdrawals from their portfolio. This laddering strategy uses CDs and bonds of varying maturities to create an efficient cash flow management system.
- Higher Income Bond Funds: Mentioned in the Aggressive section, these funds can provide more income due to holding bonds with higher interest rates.
- Personal Favorites: We can usually accommodate a favorite stock or fund into the portfolio.
- Values / ESG (Environmental, Social & Governance): These include Christian values funds and funds that provide screening for ESG concerns.
- 401(k) / 403(b) Investment Options*: Most employer retirement plans have limited investment options. Oftentimes we try to pick the best available funds and then use your other accounts to fill in the rest of the allocation.
- Legacy Capital Gains*: Some clients have large embedded capital gains in their taxable accounts. Selling the investments may create too large of a tax liability. Holding the investments may distort the planned allocation. Usually we agree on an “annual tax tolerance” - an amount of capital gains that you are comfortable taking. This allows us to unwind the position(s) over several years and deploy the proceeds within the planned allocation.
- Company Stock (stock options, etc.)*: Like legacy capital gains, selling company stock may create a large tax liability, and holding them may distort the planned allocation. We usually develop a plan for exercising the options or selling the stock over several years.
- Annuities (surrender charges, etc.): Annuities usually have fees if you surrender them within a certain time frame. These fees reduce over time so we like to have a plan for when to surrender the annuity.
* = popular customization options
Incorporating customization results in a more personalized base portfolio. Do not be intimidated by the customization options. We can review which options may work best for your situation, but remember, they are completely optional.
Once we have your “Target” portfolio designed, we’ll provide specific investment recommendations for each of your accounts for you to review. We can modify the allocation and/or specific investments based on your feedback. If everything looks good, then we’ll move on to implementation.