Investment Philosophy

Your portfolio should be designed around achieving your goals. 

Individual investments, investment vehicles, and investment strategies all have advantages and risks.

Risk, in the investment world, is most often defined as volatility which is the potential for a portfolio to go up or down. The higher the volatility, the higher the risk and vice versa.

However, risk goes beyond just volatility of your portfolio. My investment process factors in a number of other risks such as inflation (a hot topic now), sequence of withdrawal risk, risk of running out of money, liquidity risk, and more.

Each investor is unique in which risks impact them the most which is why I start with a thorough analysis of your goals and financial situation before recommending a portfolio.

I utilize two frameworks for determining appropriate portfolios for your goals: Risk Tolerance and Risk Capacity

    • Risk Tolerance or Risk Aversion is your attitude towards risky behavior. Do you play it safe or do you enjoy the thrill of risky investments with their chance for big gains? Risk Tolerance will provide a gauge on what point in the investment process you might begin to deviate from your plan if losses arise.
    • Risk Capacity is a measure of how much risk you are able to take based on your financial situation. For example, an investor with that only needs $1,000 per month from a $1,000,000 portfolio has a greater capacity for risk than an investor that needs $5,000 per month from the same portfolio. Likewise, a young investor who will not touch their retirement funds for 30 years has a greater capacity for risk than a retired investor who relies on the portfolio for income.
Once goals are assessed and an appropriate risk level is identified based on Risk Tolerance and Capacity, I work with clients to implement portfolio strategies based on common sense strategies proven to add value over time.

Know the Role of your Investments

Stocks for Growth.
Bonds for Stability.

The primary driver of your portfolio performance and how volatile your portfolio will be is your allocation between stocks and bonds if your portfolio is properly diversified (more on that next).

The below chart shows cumulative growth of a single dollar from 1926 to 2020. Notice the difference in returns between the two bond categories, US Long-Term Government and US Treasury Bills, compared to the two stock categories, US Large Cap and US Small cap. Just moving from US Long-Term Government to US Large Cap increased the ending value by 53x!

markets reward long-term investors

Proper Diversification

If you are happy with all of your investments, you aren’t properly diversified.

Diversification simply means spreading your financial resources among assets that don’t perform the same way. This is the classic “don’t put all your eggs in one basket” or “owning things that ‘zig when others zag'”. Diversification provides you with several benefits.

Investment Diversification Limits Volatility

A diversified portfolio can smooth out the investment ride and not only make it easier to stick to your plan but also give you better returns over time.

diversification smooths out the investment ride

The following chart illustrated the variation of returns over time. If you were invested in only one category of stock, you can see your returns would fluctuate dramatically. If, on the other hand, your investments diversely span many different categories your returns average out well. 

diversification evens out returns
Diversification Captures Returns
benefits of diversification

The idea of putting all of your money into the next hot stock is very seductive. How often do you see advertisements along the lines of… “If you would have taken our recommendation 10 years ago you would have been up 12,000%!”

The reality is that it is very difficult for anyone to pick who the winner will be for the next 10 years and even more difficult to actually hold that investment for the 10 years as each year’s headlines are constantly luring you to do something else.

Amazon reached a price of $106 per share in December 1999 but then fell after the Dot Com bubble burst. In mid-2002, the S&P was down 30%, Amazon was down 81%. It wasn’t until late 2009 that it reached $106 per share again!

However, since 2009, Amazon has been one of the biggest generators of return. Missing out on this top earner would have had a big impact on your overall return. The below chart shows the total global stock market return from 1994 to 2020. All of the global stocks returned an annualized 8.2% per year during that timeframe. However, if you didn’t hold the top 10% of performers, your annualized return drops to 3.6% per year. On a $100,000 portfolio, that’s adds up to a nearly $580,000 difference in portfolio value.

Staying Invested

discipline is rewarded
There are always headlines out there to scare off investors but staying invested for the long-run has yielded superior results even through the difficult times.
Source

Not being invested and potentially missing out on a just a few key days can be the biggest detriment to your performance. Since 2001 until 2020, the average return was 7.47% per year being fully invested. However, if you missed the 10 best days out of ~4,780 market days (0.2% of the total days), your return would drop to 3.35%.

The best days don’t happen when everyone is optimistic and the markets are humming along. 7 of the 10 best days happen within 2 weeks of the 10 worst days. The times when the markets are the scariest, when news headlines are shaking our confidence, when financial forecasters are crying doom, that’s when we are most likely to see the positive days that define our investing experience.

Stay invested - S&P returns
The happiest, and often most successful investors I meet are the ones who say they only look at their investments a few times a year.

What does a portfolio managed by Gilbert Wealth look like?

A diversified portfolio forms the basis of your portfolio and allows the markets to work for you.

Your globally diversified portfolio includes thousands of stocks and bonds based on your goals and risk. If you have outside investments, I will incorporate those balances into your overall allocation to maintain a balance.

Tilt your portfolio holdings based on time-tested, sensible strategies.

    • Small Cap Stocks: Over long periods of time, smaller companies have higher returns than larger companies.
    • Value Stocks: Investing in companies at lower prices.
    • Profitable Companies: Investing in companies with higher profit margins within the same industries.
    • Super Trends: Investing in industries and sectors that will shape the future.

Fund Selection

    • My investment fund selection process begins with a thorough due diligence process, assessing the investment’s objectives, past performance, management process, and costs of the fund. Funds are benchmarked and compared against other related funds to determine the best fit for your portfolio.

Control Costs

    • Fund Fees: The higher costs you pay for an investment, the more the manager has to outperform just keep up with a standard index fund.
    • Rebalancing: Regularly assessing and implementing adjustments at specific thresholds.
    • Taxes: Positioning your investments in a tax efficient manner reduces your tax burden and the tax drag on your portfolio.

Tax Loss Harvesting

    • I implement tax loss harvesting where possible to provide some tax benefits without affecting the overall composition of your portfolio.

Rebalancing

    • Periodic rebalancing based on how far your portfolio is off your stated allocation helps to keep your portfolio risk in balance. There is not a set time period these are assessed rather it is based on current conditions.