Broker Check

Building a Growth Portfolio

| November 20, 2014
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Building a Growth Portfolio

For nearly 16 years, I guided both investors and advisors on how to build investment portfolios for growth at a large brokerage firm. Now, as an independent advisor, I believe that I am even better positioned to help you build and manage a growth portfolio.  So how is a growth portfolio built?  And why do I feel that I am in a better position than ever before to help with the ongoing management of your portfolio?  I aim to answer those key questions here.

First let’s start with the five steps of portfolio management.

1.       Asset Allocation – this is a mix of stocks, bonds, cash, and alternative investments. By increasing the amount of stocks in your portfolio, you increase the chances for growth but also increase the risk.  Increasing the amount of bonds and cash in the portfolio tend to lower the volatility, but may also lower the growth potential as well. There are also a broad array of alternative investments available that may offer a low correlation to stocks or bonds thereby improving portfolio diversification and potentially lowering risk. Each asset class has its own risk and return characteristics.

 

2.       Sub Asset Allocation – the universe of stocks can be divided into sub-asset classes. This commonly includes stocks of large companies, medium size companies, and small companies.  It also includes stocks selected for value characteristics, growth characteristics, or a blend of each. Most investors will have both a domestic stock and a foreign stock sub-asset allocation.

 

Value

Blend

Growth

Large

%

%

%

Medium

%

%

%

Small

%

%

%

For bonds, the sub asset classes commonly include high, medium, and low quality bonds as well as limited, moderate, or extensive interest rate sensitivity.

 

Limited

Moderate

Extensive

High

%

%

%

Medium

%

%

%

Low

%

%

%

 

3.       Investment Selection – the next step in the process is to identify appropriate investments in each of the asset classes and sub asset classes listed above in steps one and two. For stocks and bonds this might be individual securities, mutual funds, or exchange traded funds. Further, with mutual funds and exchange traded funds you have both passive (index) and actively managed funds to choose from.

4.       Rebalancing – over time, as the market and economy change, some asset classes will become over-weighted and others will become under-weighted. Trimming the over-weighed asset classes and reinvesting the proceeds in underweighted asset classes maintains the intended percentages and may increase returns over time as it forces you to sell over-weighted performers and reinvest proceeds in those that are under-weight.

5.       Research and monitoring –

a.       Strategic Asset Allocation strategies use the four steps above without consideration for the current economic environment or current market conditions. Each asset and sub-asset allocation percentage is held constant over time until the investor’s life circumstances change, such as the transition to retirement. Investment selections are researched carefully, selected, monitored and replaced if they underperform similar investments or if they drift from their prior sub-asset class. 

b.      Tactical Asset Allocation uses the four steps above with consideration toward current market and economic considerations. A tactical strategy attempts to over-weight asset classes and sub-asset classes doing better and under-weight or avoid completely asset classes doing worse.  Investment selections are carefully researched, selected, monitored, and replaced based on tactical over and underweights as well as performance. There is no assurance that a tactical strategy will outperform a strategic strategy or that strategic will outperform tactical over time.

Why am I in a better position than ever before to help you manage your portfolio?

As I have spoken to investors over the years about the steps above, I have found that most of them do not have a strategy and very few are following the steps outlined.  Many investors I have spoken to randomly selected a few investments with little consideration to how they work together and whether there are gaps or overlaps in their investment plan. So if you don’t have the time, inclination, or expertise to manage your portfolio effectively, now is time to get help.  I feel that I am better positioned than ever before to be the trusted advisor you need.  Why is that?

1.       Fiduciary Responsibility – first, as a Certified Financial Planner ™ I have a fiduciary duty to you as the client. This means I am held to the highest standard of care and I represent you and your interests.  Many people in my industry are not held to the fiduciary standard, they are instead held to the suitability standard.  This means they represent their company and any recommendations they make must be suitable.

2.       Minimize Conflict of interest – I charge either a flat fee or a small percentage of assets managed. Together, we have complete flexibility of investment selection using a tactical approach.  This may mean shifting assets to cash during a moderate to severe market selloff. Many other firms offer management strategies where they don’t get a management fee for cash and thus keep you fully invested no matter how the markets are doing.

3.        Flexible offering – I offer services to help you build and manage a portfolio yourself, or I can manage your investments for you.  Either way, you will hear from me regularly since I work with a small group of clients.  Larger firms may not have the capacity to contact you more than a few times a year, as a result, you may not get the help you need, especially if you elect to self-manage.

Give me a call or send me an email today, and together we can get your investment plan in place.

All investing involves risk, including the possible loss of principal.  There is no assurance that any investment strategy will be successful

Rebalancing may be a taxable event. Before you take any specific action be sure to consult with your tax professional.

Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns.

Asset allocation is an investment strategy that will not guarantee a profit or protect you from loss.

Asset allocation, which is driven by complex mathematical models, should not be confused with the much simpler concept of diversification.

Exchange-traded funds are sold only by prospectus.  Please consider the investment objectives, risks, charges and expenses carefully before investing.  The prospectus contains this and other information about the investment company, can be obtained from your financial professional at 425-495-7484.  Be sure to read the prospectus carefully before deciding whether to invest.

Investors should consider the investment objectives, risks and charges and expenses of the funds carefully before investing. The prospectus contains this and other information about the funds. Contact Denton Olde at 425-495-7484 to obtain a prospectus, which should be read carefully before investing or sending money.

Additional risks are associated with international investing, such as currency fluctuations, political and economic stability, and differences in accounting standards. 

The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.

 

 

 

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