Investment Philosophy

Discipline. 

 

Research shows disciplined investors who avoid sudden emotional reactions to market changes give themselves the highest long term returns.

 

My MBA focused in Finance and years of trial portfolios, simulations, research, investing clubs, and experience have convinced me of the following investment philosophy.

 

Long Term Investing:  Union Hill does not “time the market”.  Typical “market timing” investor behavior causes losses to be magnified and gains to be missed, which is why 4 out of 5 active management mutual funds perform worse than a standard index.  Emotional investors lose the most. 

 

If you watch TV or read publications looking for the hot fund or hot stock, you’re falling into an industry marketing trap.

 

Asset Allocation:  It’s fun to brag about picking stock winners, but many studies prove success is more dependent on asset allocation: the right spread of industries, geographies, company size, etc. and the right mix of stocks, bonds, and real assets. 

 

Transaction costs:  Look out for the advisor who wants you to sell all your current holdings and purchase their model portfolio.  I won’t recommend you sell current securities without a compelling reason.  Usually I will simply research which stock, fund or other asset would be an appropriate diversifier for your current portfolio.  Commissions and capital gains tax are considerations. 

 

Some adjustments are appropriate:  Systematic rebalancing of portfolios is necessary to maintain desired portfolio characteristics.

 

Risk Tolerance:  We each have an emotional and a financial risk tolerance. Volatility has financial implications  unique to our individual financial circumstances.  We also have an emotional response to downturns.   Your risk tolerance helps determine an appropriate asset allocation.  

 

Modern Portfolio Theory prescribes investment techniques where each investment is considered for its effect on the overall portfolio.  Statistics on price movements can enable selections where losses in one security minimize correlated losses on other securities in the portfolio.  A carefully chosen portfolio will maximize expected long-term return at a set measure of  risk/volatility or conversely minimize risk/volatility for an expected long-term return. 

 

Fund Selection:  Index funds are best for investors who are sensitive to individual stock volatility. 

 

Costs are what drain profits from mutual funds.  Most “active” mutual funds are losers, and the more active they are, the more they drain investors’ assets.  (proof)

 

Pick funds which are consistent in their methodology.  Pick funds which track their stated indexes with  minimal management cost — management costs are passed on to investors.   Pick funds that match your tax needs: funds with high turnover can cause tax bills even when you aren’t trading, and tax-advantaged funds can improve your after-tax returns on taxable accounts.

 

Funds exist which are low cost and track their component indexes accurately.  Other dimensions of funds selection are volatility (a risk/return tradeoff), tax efficiency, diversification measures, and target retirement date (some funds rebalance equity assets to a target level of lower risk bonds on a prescribed schedule to reduce risk as you approach retirement or needed withdrawals). 

 

I prefer the fund families from companies such as Vanguard and Schwab because of their reliability and low cost.  My job is to recommend the appropriate selection of funds based on your risk profile and target withdrawal schedule.   Another job of mine is to record WHY we bought those funds and periodically evaluate whether they are serving their purpose.

 

Stock Selection:  I am comfortable with individual stocks in a portfolio.  For clients who prefer to hold individual stocks, I focus on achieving an acceptable level of diversification in the portfolio.  Clients usually have good reasons for the stocks they like.  My job is to keep those reasons — and the portfolio — in balance.

 

FYI I personally hold both stocks and funds in my portfolio, consistent with the above philosophy.

 

Diversification: The right combination of assets reduces risk without reducing return when they don’t track each other closely.

 

Annuities and Bonds:  Many annuities are disguised bond funds with most of the return going to the broker or insurance company.  Like bonds, annuities can be outstripped by inflation.  This is a huge risk in today’s economy, and is the tradeoff you make when seeking fixed returns or “variable” returns where the annuity has limited upside.

 

Annuities can have a place in a portfolio  if you have maxed your income deferral via IRA’s, 401K’s, etc.   I would never recommend a variable annuity handcuffed to a surrender charge — if you are being sold such an instrument walk away and call me ASAP because you can get the same or better product with no surrender charges from solid companies like Vanguard or TIAA-CREF.  I also can perform an analysis of your existing variable annuity and determine the cost/benefit of rescuing it: converting it to a flat-fee annuity to reduce  costs being siphoned from your principal. 

 

Other investments:  I recognize the value and enjoyment of real estate, collectibles, business investments, etc. in a portfolio, but I do not take a role in selecting these investments.  I will calculate their value in your portfolio when appropriate to reduce overall portfolio risk, and can help you measure the tax, insurance and estate decisions on those assets.