Choosing an Investment Advisor
One of the most important steps in choosing the best investment advisor for your financial goals and needs, is understanding their investment philosophy and portfolio management techniques. Please take a few moments to review ours and contact us with any questions. We would be glad to discuss them with you and address any concerns that you might have.
We employ Modern Portfolio management techniques which are concerned with investment analysis, portfolio design, and performance evaluation. Our attention is on the overall composition of the portfolio rather than the traditional method of analyzing and evaluating the individual portfolio components. As your advisor, we assist you in determining the appropriate level of risk for your portfolio. Then, we design portfolios that optimize the risk-reward parameters for that given level of risk.
Our broadly diversified portfolios are built upon the pillars of Modern Portfolio Theory. Harry Markowitz earned the Nobel Prize in Economics for his work in this area. There are four basic premises at the foundation of Modern Portfolio Theory:
- Investors are inherently risk-averse. Investors are not willing to accept additional risk unless the returns generated will fairly compensate them for that risk. How much additional return is necessary to justify higher risk is up to each individual investor’s objectives and risk tolerance.
- Financial markets are basically efficient. Efficient markets result when the flow of information in today’s technological age is so seamless that it is extremely difficult or impossible for an investor to consistently utilize superior skills in selecting individual securities and timing the markets to outperform benchmarks of market performance.
- An investor’s attention should focus on complete portfolio composition instead of individual security selection. Consideration of portfolios as a whole and optimally blending global asset classes plays a more important role than selecting the “right” components of the asset classes.
- There is a rate of return that should be achieved for any given level of risk. The higher the risk, the greater the return potential. Quantitative methods are used for measuring risk and diversification, making it possible to create efficient and theoretically optimal portfolios. Portfolio diversification is not so much a function of how many individual securities are included, as it is of the relationships of each asset class to each other and the proportionality of those assets in the portfolio.
Investing is no longer a one dimensional process of selecting the right stock that is positioned to turn a profit next year. Maximizing your potential to achieve return objectives requires a scientifically driven asset allocation. Asset allocation is the process of selecting a mix of asset classes and the efficient allocation of capital across those assets by matching rates of return to a specified and quantifiable tolerance for risk. Risk tolerance is essentially the percentage of an investment portfolio that an investor is willing to risk to achieve a return objective.
Over complete market cycles a pure Modern Portfolio Theory portfolio will most likely result in a favorable risk-return tradeoff. There are certain market environments, however, when a portfolio being managed solely on the premises of Modern Portfolio Theory will be subject to considerable tracking error. Tracking error is the underperformance of a portfolio verses its market benchmark.
So, just as it is important to diversify your portfolio across a set of global asset classes, we are of the opinion that it is also important to diversify your portfolio across management styles. For many of our clients we employ a tactical momentum approach to investing as a complimentary strategy to the Modern Portfolio Theory approach described above. This strategy has historically been effective in minimizing tracking error during those periods when a Modern Portfolio Theory approach is out of favor. The percentage of assets committed to the tactical strategy is a function of investor risk tolerance. The tactical approach we employ follows a disciplined strategy that systematically upgrades positions to holdings that emerge as market leadership. Such positions are held until their momentum slows and new market leadership is evident. The following is a brief summary of the investment theory behind our tactical approach:
The premise behind the momentum strategy we employ is that the best investment returns can be attained by continually upgrading assets into what is determined to be the current top performing funds within a given style and risk class. Continually upgrading refers to the ongoing process of (1) classifying mutual funds / ETFs by risk; (2) ranking the mutual funds / ETFs based on performance using the manager’s proprietary methodology; and (3) adjusting a portfolio’s holdings to upgrade from under-performing mutual funds / ETFs to those that rank higher as a result of this analysis. The strategy is a systematic method of following market leadership that has been developed and refined over the past 35 years.
Upgrading is based upon the observation that few, if any, money managers consistently excel. Professional money managers (including mutual fund managers) each have a particular style of investing that works well in some, but not all, market environments. Market leadership changes because economic conditions change. As the market leadership rotates, it is our goal to utilize this momentum upgrading strategy to migrate a portion of our clients’ capital into those best performing segments of the market. When combined with traditional Modern Portfolio Theory, this tactical momentum approach is an attractive complimentary strategy that helps to minimize tracking error and provides an opportunity for enhanced portfolio returns.
Disclosure Statement: The contents of this website are for informational purposes only and are not a solicitation to either buy or sell securities. No new account will be accepted unless and until all local regulations have been satisfied. The material presented on this website is from sources believed to be reliable, but it's content is not guaranteed and may be subject to change at any time. Please read our privacy policy prior to leaving this site. Northwest Advisory Group, Inc. does not offer guaranteed rate programs. Investing in financial markets involve the risk of losing principal. Northwest Advisory Group, Inc. does not manage bank guarantee or FDIC accounts. All visitors to this website should note that past performance is not necessarily indicative of future results.