In our last newsletter, we shared a snippet from our “Portfolio Construction, Management, Philosophy & Process”, which was focused on the behavioral finance aspects we take into consideration in the design of portfolios for our clients. At the end of this edition, we will share another snippet. We believe it is helpful for clients to understand our philosophy and process to reassure them that there is a lot of reading, research, thinking and discussion incorporated into our strategic asset allocation and the tactical tilts undertaken in reaction to these drivers of portfolio outcomes. In this process we integrate cross-disciplinary research of the business cycle, the domestic and global macroeconomic environments, the markets, along with government policy and corporate earnings.
One example is the Fed has been telegraphing its intent to lower the Fed Funds rate, and there is a cascade of market events that follow from this that certain tactical tilts may take advantage of…but on a client-by-client basis, this may be easier said than done. In taxable portfolios, which are predominantly the kind of portfolios we manage, making changes to capture past gains and raise liquidity for a tactical tilt creates a tax impact. So, we are constantly weighing the probability of the unknown, i.e., how much benefit do we expect from the tactical tilt, against the known…the tax bite to the client. There are portfolio management tactics we utilize to mitigate the tax impact and avoid sacrificing earned returns, but in many cases the opportunity exceeds the available tax mitigation. This is why we place so much emphasis on educating our clients on the process we follow and why…the media does us no favors here…their goal is to generate advertising revenue, not true consumer education, and therefore they broadcast the return of the “market”…which is an index with no trading costs, no tax drag, and an unlimited time horizon. Often clients become fixated on the market’s return without consideration of their own risk tolerance, risk capacity and investment time horizon.
Here we share with you another snippet from our “Portfolio Construction, Management, Philosophy & Process” -
“DATA, INTERPRETATION and APPLICATION
We are looking at data every day, and the news flow is constant. We do this so our clients do not have to…we read, listen, review and think about how this mass of data can be utilized. Over the short term, it is hard to predict where things go. In some ways, it is easier to predict the long-term as most asset classes follow the historical process of reversion to their mean. So, the longer, the better. This reversion to the mean for asset classes then dictates that strategic asset allocation and tactical tilting are the places to leverage this constant review of daily data inflow. For this reason, we are always educating our clients about the process and time because recommendations can be counterintuitive, and what is a short time period often feels long to them, but for us, following the market and economic cycles, which tend to be very long, longer term is the way we think about it.”
Dave & Drew
Comments