We call our portfolios FITfolios. FIT stands for financial investment theory. We believe in adhering to a disciplined formula based around risk management to maximize returns.
Fitfolios stand for Financial Investment Theory (FITfolios).
In order to create your custom risk-adjusted portfolio, we have a three step process.
1. Nobel Prize Winning Theory - Modern Portfolio Theory (MPT) - Efficient Frontier
Our investment approach starts with the time-tested, Nobel Prize winning research known as Modern Portfolio Theory. This theory says that the vast majority of your long-term investment return is based on how your funds are allocated. We call this diversification. Although timing the market and picking the right stock to purchase are a large part of the daily financial news cycle, research shows that this style of long-term investment management only accounts for less than 10% of your total return.
Modern Portfolio Theory won a Nobel Prize for a few different reasons. It looked at the measure of risk you were comfortable taking, and lined that risk up with an appropriate amount of return you should expect from it. This also determined how much of your savings should be in the different types of asset classes to choose from (both US and International Large, Mid, and Small Companies). That makes great sense, but the vast majority of portfolios we review are taking more or less risk for the returns they are receiving. They are not falling on the line known as the Efficient Frontier (think of an upside down Nike Swoosh). As an investor, you want to know that for the level of risk you are willing to take, you are being rewarded with what is considered a fair return. For example, if you want to put all your money in US Treasury Bonds, you are in what is known as risk-free investments (the US has never defaulted on a US Treasury). This means your risk is very low, and therefore you should expect a very low return. However, if you are willing to put your money in equities like the stocks associated with the S&P 500 Index, your appetite for risk is much higher and therefore you should be rewarded with a much higher return. A lot of us are somewhere in between, but we need to measure your risk along with where you are at in your personal financial life cycle (working versus retirement years) to come up with your eventual mix between equities and fixed income. This is a great starting point and assures you are being rewarded appropriately for the measures of risk you are willing to take, and that it also aligns with where you are at in your person financial life cycle.
2. Moving Averages of 25 Indices - Domestic & International
Through our proprietary process, we apply the results Modern Portfolio Theory gives us to each major asset class (Large, Mid, Small, International, and Fixed). Once we know how much is appropriate to invest in each sector for you, we then review different Indices in each asset class area to help determine an overweight or underweight in value, growth, or blend companies. This is accomplished by looking back at the 60, 90, and 120-day moving averages of these sectors and comparing them against one another. This process is using what economists call a "lagging" indicator, however, we have found that this helps with determining the emphasis as to where your dollars belong in an overweight versus underweight capacity. For example, If we focus on large cap, most people will think of the S&P 500. This represents 500 US large companies and is supposed to be a good indicator as to how the health of the stock market is in the United States. MPT told us that you should invest 25% of your money for example in Large US companies. We then look at the moving averages described above and determine that most of your allocation in this asset class over the past 60, 90, and 120-day moving averages was doing very well if you were over allocated to the growth versus value area. We then would determine how much of the 25% should be invested in Large US Growth Equities. We do this for all 5 of the major asset classes MPT gives us advice on. Moving Averages are misunderstood but are a major lagging economic indicator that helps us determine your overweight or underweight into each major asset class. There are two different types of moving averages we review. A Simple Moving Average (SMA) applies an equal weight to all observations in the period, where as an exponential moving average (EMA) puts an emphasis on the more recent movements. Once we've reviewed the moving averages of the 5 asset classes, we determine the overall allocation percentages of each portfolio. We then move to step three, choosing the investments.
3. Investment Choice - Performance, Costs, Track Records
After reviewing Modern Portfolio Theory and Moving Averages of Major Indices, our final decisions are the actual investments that match the research. There are many choices in each asset class that will ultimately match our final results, and it is our job to further breakdown which ones to choose and why. We look at three areas once we have identified multiple investments that match our results. Performance is one area we do look at, but it is not the only area. What you start to realize is that performance is affected based on other major factors like costs to buy and sell the investment, and also the track record of the company or team that is managing the investment. Once we have had a chance to review performance, costs, and the track record of the investments that match, we can come up with one or two that make the most sense. You leave it to us to determine which one is most suitable for you. We are independent, so we do not sell our own funds and really choose what we think will perform the best. We always tell our clients that we sit on the same side of the fence as them. The reason we state this is because we share in your success. If we can shave costs and have better returns in your account, we both win! We have not met a client yet that does not like this transparency in our relationship.