At DWM, our job is wealth management. We look to help our clients secure their financial futures through comprehensive financial planning and prudent investment management. Today, I’d like to focus on the investment management part which adheres to our philosophy of protection first, growth second.
Some readers may be familiar with DWM’s approach to investment management. At its core, it starts with the identification of our clients’ goals and constraints. We do this by identifying their goals, risk tolerance, return objectives, income needs, time horizon, and other special requirements. As every client is unique, so is each client portfolio.
We then match the characteristics of their goals and constraints with a specific Asset Allocation mix tailored to them. For example, x% equities via the DWM Core Equity Portfolio, y% fixed income via the DWM Core Fixed Income Portfolio, and z% alternatives via the DWM Liquid Alternatives Portfolio.
But many of our readers may not know the logistics of building those three DWM exclusive portfolios. Here is a little bit of the secret sauce:
The three major asset classes of equities, fixed income, and alternatives are further broken down into subclasses, which also have different exposures, risks, and potential returns. For example, we divide the equity portfolio into different sectors and market capitalizations, as well as between domestic and foreign stocks. We also pay attention to value vs growth. Then, in the fixed income portfolio, we split out exposure into government debt, corporate debt, and international debt, while paying special attention to credit risk and duration.
From there, there are several ways to go about choosing the securities to fulfill the subclasses. Our affiliation with Charles Schwab & Co- and its investment platform which makes most of the public investment universe available to us, there are lots of securities – some great, some not so great – to choose from.We further filter by looking at the following:
- What type of exposure do we want to have in that subclass (for example, is market-cap weighted okay or is better to use a different methodology like factor-weighting)?
- Total price to own and trade that security (e.g. the Operating Expense Ratio “OER” and ticket charge if applicable)
- Volume: does the security trade enough for our firm to take a position for our clients’ portfolios
- Security vehicle (ETF or Mutual Fund): both come with different characteristics
- How do the securities complement one another, keeping in mind that non-correlating assets maximize your diversification benefits
It should be noted that from a risk management perspective we aren’t big fans of individual stocks. In fact, we began phasing out the use of individual stocks within our DWM-managed portfolios over a decade ago. Why?
- Company-specific risk: When allocating percentages of your portfolio to individual stocks, you run the possibility of the company represented by said stock going bankrupt or having a similar setback that can greatly increase the overall risk of your portfolio.
- More diversification with low-cost mutual funds and exchange-traded funds: With MFs and ETFs, we can incorporate the exposures to different individual stocks in one bundle, without having to have the aforementioned company-specific risk.
As you can now see, a lot goes into building and maintaining a portfolio. Once the initial portfolio is established with the appropriate weights to various investment style exposures, it is anything but “set and forget”. These “weights” or allocations to asset classes and the underlying investment styles can significantly fluctuate and will need to be rebalanced. Or we may find that we want more or less exposure to a specific area and thus adjustments are needed. Furthermore, new products – some great, some not so great – come to the market every day. If we identify one that is potentially a better fit to our model and it passes our due diligence process, we will make changes accordingly, whereby we execute trades via our sophisticated channels.
In conclusion, portfolio management is constantly evolving. Ongoing education and research is paramount to a solid investment management practice. At DWM, we don’t take that responsibility lightly. Through diligence and care, we seek to help our investors make their money work harder by eliminating the unforeseen landmines in their portfolio. Diversification, low-cost mutual funds/ETFs, and consistent portfolio monitoring are wonderful tools that DWM implements to help accomplish this hefty task, and keep our clients on track to meeting their financial goals.