Broker Check

Our Philosophy on Model Portfolios

| July 19, 2019
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One of the approaches we advocate is the use of model portfolios. We use our own and third-party asset managers. Our model portfolio is a culmination of our best ideas based upon time-tested investment principles and an understanding of behavioral finance.

A model portfolio has the potential to mitigate some of the psychological tricks the human mind can play on you when it comes to investing. Both the client and the advisor are susceptible to logical fallacies and cognitive biases including:

  • Bandwagon fallacy: Investors too often jump on the bandwagon of the latest investment trend or fad. This can and often does lead to disastrous results.
  • Endowment effect: Investors can fool themselves into thinking that what they own is worth more than it is. Inherited assets or favorite stocks can seem worth more because it "mine".
  • Recency bias: The most recent bull market can help us forget a more distant stock market crash, and vice versa. Past performance is no guarantee of future results, no matter how recent.

The strength of a model portfolio is that it may mitigate these and other examples of faulty thinking. A model portfolio doesn't care about you and your feelings. Instead, a model portfolio is attempting to use time-tested investment principles to make allocations most appropriate to everyone invested. This mechanical, logical approach may help save us from ourselves, so to speak.

Our models have certain characteristics. The models are based upon the common tenets of Modern Portfolio Theory. However, we advocate for the use of technical data to help us choose what may be the best allocation. In the short term, we are not concerned with "beating the market". Instead we are concerned with capturing as much of the upside in a bull market, while mitigating downside capture in a bear market.

Formulating our diversified, tactical asset allocation model is based on a set of rules informed by technical data like:

  • Momentum: Data based on empirically observed tendency for rising asset prices to rise further, and falling prices to keep falling
  • Relative Strength: Data based on comparing one market or sector to another to determine strength.
  • Price Action: Data based on current prices as compared to past price averages.

We use these rules to pick the best Exchange-Traded Funds (ETF) for our model portfolio. We use ETF's for several reasons. First, due to their ability to be traded intra-day. Second, they tend to have lower internal expenses compared to active mutual funds. Finally, they make tax-loss harvesting easier while staying invested.

Can our models be a possible fit for you? Let's continue the conversation, click here.

 

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