Investment Management Process
Investment Management strategies can be the most difficult for clients to follow and stick to over the long-term because volatility in financial markets play on the emotions of even the most sophisticated investors. Rising markets give rise to euphoric outlooks and increased deposits into the market increasing the risk exposure to the downside while falling markets can elicit feelings of doom and destruction leading clients to abandon long-term plans and withdraw their money from the market only to miss out on the rebound. These fluctuations of short-term investor sentiment can have damaging affects on the long-term return of the client's portfolio (Edgepoint Wealth: Mirror, Mirror - who's the biggest reason for your investments fall?).
Reid Wealth Management uses Comprehensive Financial Planning to accurately quantify your financial goals so that investment portfolios can be designed to meet the required rate of return needed to achieve those goals. This allows you to better track each investment pool to ensure that it is performing within the parameters required to meet the investment's respective objective. Better tracking and positive reinforcement allows you to tune out the noise in periods of market volatility knowing that your short-term goals are protected with low volatility investments, while your riskier, long-term investments will participate in the market rebound that is inevitable allowing the value to recover and return to further growth.
Goals Based Investing
My approach to goals based investing is based on timing, amount and tolerance. When do you want to achieve the financial goal (i.e. buying a cottage)? How much do you plan on the goal costing (i.e. purchase price of the cottage)? Knowing the when and how much allows us to look at what you currently have to determine the rate of return required to meet the goal value in the desired time horizon.
Example: Judy has indicated in her discovery meeting that she would like buy a cottage in ten years, would like to spend up to $500,000, currently has a $200,000 investment account that can be "assigned" to this goal and can deposit $1,000 per month toward this goal.
The required rate of return to have $500,000 in the account in ten years is 5.36%. Judy has a medium risk tolerance and with a time horizon of ten years this is a suitable and achievable target rate of return.
Target Asset Allocation
By using the Comprehensive Financial Plan to calculate the required rates of returns to reach your financial goals I would build customized, unique portfolios for each investment goal. This will ensure that each one of your goals has a separate investment plan designed to reach your goals in the time horizon allotted while remaining suitable for your risk tolerance.
Tactical Asset Allocation
Once the goals are identified and the portfolios are built I continuously monitor them and actively manage the asset allocation to better align the investments with macroeconomic/market trends and the shortening of each goal's time horizon as you move closer to their desired dates.
Example: Market fundamentals on the S&P 500 are showing an elevated market valuation as the forward price to earnings ratio is 20% higher than its long-term average suggesting that expected returns at these valuations are historically lower than what we want to earn from equities and there is a likelihood of a market correction as earnings are not growing enough to justify the high valuation.
We could take a number of actions in this case, such as reducing the equity risk and lowering the expected volatility by selling down some of the S&P500 allocation and adding that into the Fixed Income portion of the portfolio. Another type of allocation that I may consider modifying is by moving more of the allocation into an actively managed ETF or mutual fund and reducing the exposure to a passive S&P500 Index ETF as the actively managed product historically performs better in a down market. When the trend reverses (as it always does) we could look to make the opposite adjustments to make the portfolio better positioned to participate in a rebound in equities.
Example: David opened an RESP for his daughter 14 years ago and has been contributing to it regularly ever since. At the time of opening the account the time horizon to use the funds was 17-18 years (when his daughter will graduate high school) and thus had an equity skewed asset allocation of 80% equity and 20% fixed income.
During subsequent portfolio reviews the remaining time horizon would be considered and the equity weighting in the portfolio would be slowly reduced to coincide with the reduction in the time horizon. The RESP cannot afford to be heavily invested in equities now because the capital could be seriously impaired by an equity market sell off and there would not be enough time for the investments to rebound since the funds are required for tuition and expenses in just a few more years. If executed properly the investment pool's long-term performance should be trending down as we get closer to the goal's end date because risk is reduced as we get closer to the time in which the funds will be needed for the goal.
I use all types of different investment products and I am not encouraged or compensated additionally for recommending Manulife products. I simply look for the best option for your situation and do not have any restriction on products that I would recommend. Sometimes the situation will be best for low cost ETFs while others may call for more active management and we would look at active ETFs and mutual funds. I tend to use ETFs and Mutual Funds to build the core of the investment portfolios. I will then choose individual equities or specialty products that I think are in businesses that are important for long-term trends in the Economy and will add extra value in your accounts.