Key elements of our investment philosophy can be summarized as follows:

  • Asset allocation is the most important decision that an investor faces and time horizon and risk tolerance are the most important factors in determining asset allocation
  • Broad portfolio diversification enhances long-term performance relative to risk
  • Expenses matter – high expenses and taxes reduce long term returns
  • Systematic rebalancing promotes a “buy low, sell high” philosophy and avoids market chasing

Asset Allocation

From review of capital markets history, we have made the following observations regarding stocks and bonds:

  • Long-term returns for stocks have been significantly higher than bonds and cash
  • Volatility has been significantly higher for stocks than bonds and cash
  • The adverse effects of the volatility of stocks relative to bonds and cash have been reduced or even eliminated over longer time horizons

From these observerations, we have concluded that the most important decision an investor faces is the asset allocation decision - the allocation among stocks vs. bonds and cash. Further, based on the impact of time horizon on the effects of volatility, the most important factors in determining asset allocation are time horizon and tolerance for volatility (risk tolerance).

Longer time horizon and higher risk tolerance support a more aggressive portfolio investment objective in which greater volatility is accepted to pursue greater long-term portfolio returns. Shorter time horizon and lower risk tolerance support a more conservative portfolio investment objective in which lower returns are accepted to pursue lower volatility.

Given the importance of time horizon, we place significant emphasis on quantifying Clients’ financial goals in terms of time horizon and analyzing the implications of Clients’ cash flows and liquidity on time horizon. To that end, and based on perceived major weaknesses of commercially available software tools, we have developed a proprietary cash flow modeling and asset allocation simulation tool to assist Clients in analyzing capital sufficiency and making the critical asset allocation decision.

Broad Portfolio Diversification

Modern Portfolio Theory (“MPT”) suggests that broad portfolio diversification enhances the risk/return characteristics of a portfolio. Further, MPT suggests that, given expected returns, volatility and correlations of various asset classes, an “optimal” portfolio can be identified for any given level of expected return and risk. The result of portfolio optimization is illustrated by what is commonly referred to as the “Efficient Frontier.”

Many advisors suggest that software tools can be employed to identify these “optimal” portfolios for Clients. While we have great respect for Modern Portfolio Theory, what separates practice from theory is that, in order for optimization to be achieved, one must accurately predict the expected return and volatility of each asset class, as well as the correlation of each asset class with every other asset class. We suggest that such predictive ability is not likely to exist. Also, the output of “optimization” software is highly sensitive to the inputs, often resulting in significant over- and/or under-weighting of asset classes.

We are highly skeptical of “optimization” as an approach to asset allocation. However, we embrace the conclusion of Modern Portfolio Theory that broad portfolio diversification enhances returns relative to risk. To this end, within the framework of a Client’s target asset allocation, we pursue broad diversification among distinct asset classes.

Expenses Matter

Simply stated, high expenses and taxes reduce long-term returns. We believe that many investment products are grossly overpriced. A myriad of mutual funds, money managers, hedge funds, etc. charge exorbitant annual expenses or sales charges that result in poor performance relative to lower-cost mutual funds, index funds and the like. As such, we are extremely cost conscious investors, and expenses weigh heavily in our screening process. Further, given the breadth of our tax expertise, we are very mindful of the impact of taxes on long-term portfolio returns.

Rebalancing – Buy Low, Sell High

Human nature can often be an investor’s worst enemy. Individuals often buy the latest hot fund or sector. Conversely, losses are painful and the tendency of many is to sell when the pain becomes too much to bear. These human impulses commonly result in buying or selling at the least opportune time.

Systematic rebalancing promotes a “buy low, sell high” philosophy and mitigates emotional impulses to “chase” the market based upon momentum. Once we have established a Client’s target asset allocation and implemented a broadly diversified portfolio, each portfolio is reviewed weekly to determine variance from the target allocation. Portfolios considered “out of tolerance" are reviewed and rebalanced accordingly, giving consideration to tax consequences and trading costs.



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10850 West Park Place, Suite 500
Milwaukee, WI 53224
Phone: (414) 359-2020
Fax: (414) 359-2120
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