We believe that the portfolio and financial plan should be integrated with one another, and that by managing behavior we can increase the probability of a successful investment experience.  The key to managing behavior is to have a process for making decisions regarding the portfolio.  Our process is as follows:

Investor Behavior Can Be Self-Destructive
Studies indicate that individual investors often do not make prudent long-term investment decisions. A rolling 20 year study by the DALBAR Research shows that the average investor fails to out-perform an index or unmanaged bundle of investments. The difference of returns is often referred to as the behavior gap, and may be explained by investors chasing after the hot-performing investment category. See Behavior Research  

"History teaches us that investors behave wisely... once they have exhausted all other alternatives." - Steve Leuthold

1.  Understanding Risk Preference
Because behavior can have such a large impact upon performance, the first step in building your portfolio is to understand your tolerance for risk. You will complete a risk preference assessment put together by psychologists that helps to explain how you perceive and tolerate variations in your portfolio. See Snapshot of Sample Profile

"Individuals who cannot master their emotions are ill-suited to profit from the investment process." - Benjamin Graham
2.  Structure Helps Explain Performance
 When choosing what types of investment vehicles to use when building the portfolio, it is our philosophy to look toward the research from leading academics. Research taken from two of academia’s leading professors, Eugene Fama (University of Chicago) and Kenneth French (Dartmouth College) suggests that 96% of the variation in returns is due to risk factor exposure. See Research on Variation of Returns

By focusing efforts on creating a well diversified portfolio consisting of low cost mutual funds, the allocations can be tilted toward the small and value stocks that try to capture risk premiums over the long term. Though periods of short-term volatility for stocks are to be expected, it is crucial to bear in mind that stocks have historically rewarded patient, long-term investors. See Research on The Dimensions of Risk

"The stock market has a very efficient way of transferring wealth from the impatient to the patient." - Warren Buffet
3.  Investment Design Based On Personal Goals
We believe the design of the portfolio should to be tied to your personal financial plan. You will work closely with our financial planners to outline your short, medium, and long-term goals and develop a plan to achieve them. Once your risk profile and goals are combined in your plan, simulations will be run to determine how much risk you need or how much risk could jeopardize the portfolio.  See Sample Confidence Analysis

"I would rather be approximately right than precisely wrong." - John Maynard Keynes
4.  Use Rebalancing to Capitalize on Short-Term Volatility
From time to time, market conditions may cause the various asset classes in a portfolio to vary from the approved allocation. Every year the order of each asset class performance is random and unpredictable. See Research on Randomness of Returns

The portfolio may be rebalanced periodically if the asset class percentages vary from the target by a specific set variance. Rebalancing the portfolio may help take advantage of volatility by capturing market movements, selling off assets that have gone up and buying into assets that have gone down. See Opportunistic Rebalancing

"Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves." - Peter Lynch

5.  Adjusting the Porfolio Based on Updated Plan Projections
Once your financial plan is built, it is important to meet and review the plan regularly as your goals, objectives, and resources change over time. Updating the projections will help to determine whether there is a need to adjust the portfolio allocation. See Sample Star Track

"Perspective is worth 80 I.Q. points." - Alan Kay
6.  Be Sensitive to the Pricing of the Market
Robert Shiller, an Economics Professor at Yale University, releases monthly research that tracks the Price to Earnings ratio of the market. This data shows on average how much investors are willing to pay for stocks. By comparing what investors are currently paying for stocks to what they have historically paid for stocks, we can evaluate the current pricing of the market. This can help give perspective on current market conditions based on objective data rather than speculation or guessing. See Shiller’s Historical Data

"Be fearful when others are greedy.  Be greedy when others are fearful." - Warren Buffet