Our Philosophy

Active Asset Allocation

We believe that there is no fixed asset allocation that fits all investors in all time periods. Simply put there are times when it is more appropriate to have a larger portion of a portfolio in one asset class versus another. In certain time periods the risk versus potential rewards favors stocks while in other periods favors bonds or short term cash equivalents.

A successful asset allocation should be based on an ongoing evaluation of market fundamentals and an understanding of market history. The economic outlook both in the US and globally, monetary policy and tax policy are integral parts of market fundamentals as they greatly impact the environment a company is operating in. In addition, an understanding of market fundamentals of valuations in different economic climates can help to spot when a market is overvalued or undervalued.
We believe that shifts in the asset allocation of a portfolio should be based on changes in longer term fundamentals. For example, if the expectations for future interest rates goes from stable to rising it should prompt a change in an investor’s asset allocation if they are currently holding long term bonds. Changing the asset allocation to reflect changes in market fundamentals sounds simple but is more often than not overlooked by investors. In fact it was the number one reason why most investors were totally unprepared for the bear market. Investors following our asset allocation advice when the stock market bubble burst in 2000 had no allocations to US or International stock funds.

Our recommended asset allocation uses the Vanguard Mutual Fund Group as a core holding. We have chosen Vanguard because it is a no load fund group that has low ongoing expenses. Vanguard offers a wide selection of bond funds and stock index funds that make it efficient to invest in the various asset classes. In recommending Vanguard we are in no way saying that there are not other good fund groups. Vanguard happens to be our preferred fund group.

Individual Stocks

In addition to mutual fund holdings, investors should hold a portion of their portfolio in individual stocks to enable them to take advantage of market opportunities. It is important to keep in mind that not all stocks participate equally in either a rising or falling market. While over the long term a company’s stock will move up or down based on its fundamentals, over the short term stocks may move disproportionately up or down based on investor emotions. The structure of mutual funds and exchange traded funds (ETF’s) does not allow investors to take advantage of these types of market opportunities.

In our investment analysis, we seek to uncover long term values in what we believe are currently depressed market segments which have positive long term fundamentals. We monitor the stocks we recommend and hold them until we believe the market has fully discounted their long term value. We maintain a very small number of stocks on our recommended list, at any time we have between 10 and 15 picks. Keeping a small number of stocks allows us to track these companies extensively, evaluating not only the long term outlook of the industry, but also the future of the company as well. Wherever possible we try to recommend stocks that pay above average dividends so that we are being paid some return while we are waiting for a stock to gain value. We believe that with the new tax law, dividends will become an important part of investment returns.