Investment Management

Investing begins with goals…your life goals. Whether planned or not, there are things you are trying to accomplish in life. Some of these life goals involve money and therefore have underlying financial goals. And some of these financial goals involve investing and result in investing goals.

Our investment management begin with your investment goals.

When planning a client's investments we go through a five-step system:

  • Determining client investment goals. This includes identifying your risk tolerance and return needs as well as your expected cash inflows and outflows;
  • Designing an asset allocation mix to meet those goals;
  • Developing methods and strategies to best effect the goals (this includes decisions such as how much to put in your 401(k), whether to use a Roth or Traditional IRA, etc);
  • Researching and picking specific investments.
  • Monitoring the portfolio; rebalancing as needed due to investment performance; modifying strategies due to changes in your circumstances; changing investments used if warranted.

In bringing someone in as an investment management client we will spend time explaining this process. Of critical importance is the determination of your ability to handle the risks that come with different investments (risk is simply the amount of bouncing around…especially in the down direction...that an investment or your portfolio as a whole goes through).

Knowing your tolerance to risk and your anticipated cash-flow needs (the spending money you’ll want to get from your investments in the future) we then come up with the mix of investments that will work best for you. A question that often comes up in this process is, “Why do you have so many things in my portfolio?”

It’s a fair question. After all, there are some newspaper columnists who purport that you need at most two or three investments in your portfolio. More than that, they say, is either foolishness on the investor’s part or the indication of malfeasance on the adviser’s.

With most investors, the idea is for your money to grow and grow and grow until you need it. Of course when you begin withdrawals you still need it to grow and grow even while trimming away some of the leaves per se. Those of you familiar with our articles and investment talks know that the giver of most growth is stocks (equities). This makes up the Core of our portfolios.

The main Core is made up of investment choices that 1) invest in broad areas of the stock markets of the world, 2) do so in a relatively inexpensive way, and 3) are as different from each other as we can find.

Let’s look at each part of that.

We already established why stocks…they go up more than other asset types, given time. We want to cover most of the major areas of stocks both domestic and foreign domiciles, small and large companies, growing and stable. Why all of that? Because depending on what year (or 5-year, or decade) you look at across history depends on which area has done better. While we’d love to have all your money in the one that is going to do best, we are not prophets and cannot predict the future with any particular success. Therefore we are more concerned in not ending up with all your money in the one that does worst which is why we spread the money around.

In the Core we typically use indexed exchange-traded funds. Being indexed they will perform in step with the market. We give up the opportunity to outperform and gain the impossibility of significantly underperforming their respective areas of the stock market. But more importantly the internal operating expenses of these investments are very low. In fact, low expenses with broad diversification are our primary concern here.

The problem is that since these investments are all in the same asset class (stocks), and have broad-based holdings, the performance differences that set up the opportunities is limited. They still tend to mostly most in the same direction and magnitude. That’s where the other core comes into play. We call this Core-Plus.[1]

In this area instead of indexes we use active managers (otherwise known as humans) to run the funds we use and look for those that have a particular style or market area they concentrate on. Humans are more expensive than computer-run indexes, but also have the possibility of outperforming the markets as a whole. Most importantly they are chosen for their lack of strong correlation to the portfolio core and each other. With these, our primary goal is the anticipated return they generate along with less a connection (a lower correlation) to the major indexes.

But still, the Core-Plus area, while being a lot more different (less correlated) than the portfolio core, they are still investing in the stock market. Thus while the correlations are lower they still have the same stock tendencies.

Enter the Alternative investments (drum roll please). These are the truly different funds. Whether they use hedging strategies, invest in real assets (like real estate and commodities), or in income vehicles (think bonds…but not the boring kind), they are chosen specifically for how uncorrelated they are to the two pieces of the core portfolio. Here we care more about this correlation and how it will lower the risk of the portfolio as a whole, rather than performance or costs.

If you’ve been following, here are the three parts to the main model used in almost any portfolio we manage:

Core – to keep expenses low

Core-Plus –to keep returns high

Alternatives – to keep risk low

That’s why we use so many pieces when building a portfolio. Each piece has a reason to be in the parts and each part has a reason for being in the portfolio.

But wait, there’s more. The model portfolio made up of Core, Core-Plus, and Alternatives ends up with a particular risk-reward ratio. And while everyone seems to like the reward part, a whole bunch of my clients aren’t too enamored with the risk side of things. For them, we add in a layer of the more boring bonds (we call this the Risk Reduction part).

Some of my clients actually want to spend some of their portfolio and have some fun (like eat, have clothes, and not live under a bridge). Unfortunately portfolios even with the risk reduction part added to it will still lose money when something like the Financial Crisis occurs.

While we don’t mind the dips (they create more opportunities to create later gains), we don’t want it affecting your life-style. So for those clients that have current or near-term cash needs, we keep this Cash Flow part of the portfolio in very low-risk investments.

Time for another summary:

Core – to keep expenses low

Core-Plus –to keep returns high

Alternatives – to keep risk low

Risk Reduction – to get portfolio risk lower if indicated by the client’s risk tolerance

Cash Flow – to make sure that market debacles don’t affect client lifestyles

Building this, managing it, rebalancing between things, changing out investments as necessary, tracking the results, keeping in mind tax issues, and explaining this all to you…that’s our Investment Management process.


Fees for our Investment Management services are as follows:

For portfolios with calculated management values under $135,000, the annual management fee is capped at 1.5% of assets under management.

For portfolios with calculated management values equal to or over $135,000, the annual management fee is determined per the following schedule:

Assets under management

Current charge for services

The First $1,000,000

$1000 + .75% of assets

The Next $9,000,000

.50% of assets

Amount over $10,000,000

.25% of assets

These are annual numbers. Divide everything by four to get your quarterly fees.


[1] If you prefer, you can consider the core as the hub of a wheel and the core-plus as the tire that encircles the hub.