Asset Allocation


Asset Allocation

Portfolio Structure

At Watts Gwilliam & Company, we believe that the only “free lunch” in financial markets is achieved through effective portfolio diversification. While we accept the fact that the returns of a single investment directly correspond with the amount of risk associated with the asset, a carefully constructed blend of investments that move independent of one another create results that reduce total portfolio risk without the sacrifice of lower returns. Achieving these higher returns with lower risk provides the “free lunch”.

Central to our portfolio design are four key philosophies:

  1. Successful diversification can only occur by mixing non-correlated asset classes into an effective blend. 
  2. There are great risks and costs associated with actively picking stocks, or investing in actively managed mutual funds, and an investor’s stock exposure should be done by investing in the whole market.
  3. Keeping costs low and maintaining tax efficiency is necessary in maximizing the net-returns to the investor.
  4. The risk and reward of an investment are inseparably related. Those seeking high returns must hold riskier assets.

Our clients experience the following investment process:

  1. Client Profiling: This is achieved through an interactive, and in-depth, client interview process. This collaboration helps our advisors truly understand the client’s desires, goals, ability to assume investment risk, and time horizons. The success of this step is critical to the overall success of our client relationships.
  2. Determine proper investment allocation: With a thorough understanding of the client’s situation, we are able to set the proper allocation between stocks, bonds, and alternative investments.
  3. Allocate traditional investments (stocks and bonds) into low costs, diversified portfolios, including both U.S. and non U.S. investments.
  4. Allocate alternative investments to areas such as real estate, commodities, managed futures, hedge funds, etc. 
  5. Monitor and rebalance the portfolio to ensure proper alignment with the client’s goals and objectives.


Individual Strategy

When done properly, an investor’s allocation of assets will reflect his desired goals, priorities, investment preferences and his tolerance for risk. Asset allocation is an individualized strategy, so there really is no perfect mix of assets.  Each individual’s strategy is built on the careful consideration of the key elements of their financial profile:

Investment Objectives: What it is the investor hopes to achieve using his investment dollars – improve current lifestyle; achieve capital growth; fund a specific goal, such as a college education

Risk Tolerance: This reflects the investor’s comfort level with market fluctuations that can result in losses.  Inflation risk and interest risk need to be considered as well.

Investment Preferences: An investor may prefer one asset class over another based on a certain bias or interest towards the characteristics of that class.

Time Horizon: The length of time an investor is willing to commit to achieving his objectives.

Taxation: Investing in a mix of asset classes will have varying tax consequences.


An Evolving Strategy

A sound asset allocation strategy includes periodic reviews.

About the only certainty when it comes to the financial markets is that they will change, and so will your financial situation.  Through market gains and losses, a portfolio can become unbalanced and it may be important to make adjustments to your allocation.  As people move through life’s stages their needs, preferences, priorities and risk tolerance change and so too must their asset allocation strategy.   

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

Learn more about asset allocation by contacting us today.

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