Investment Strategies

There are three primary asset classes; cash, bonds and stocks.  Each of these asset classes has its own characteristics and place on the risk / reward spectrum.  To a great extent they tend to perform independently of each other, typically with higher returns following higher risks.  Modern Portfolio Theory asserts that the overall risk of a portfolio , i.e. voltility, can be controlled by combining uncorrelated assets in the right proportions without sacrificing return.  Numerous studies (e.g. Brinston et al.) have shown that selecting the right allocations of these primary asset classes is the dominant factor in determining portfolio performance.

Strategic Asset Allocation:  Each primary assset class can be divided into many categories, e.g. value and growth stocks, domestic and foreign assets, etc.  A well diversified portfolio includes allocations to these categories which are appropriate for the individual investor as determined by his Person Profile.  Typically index funds or exchange traded funds (ETFs) are used to represent the asset classes.  Once a strategic allocation is designed and implemented the only trading necessary is periodic rebalancing to correct for drifts caused by movements of the markets.

Tactical Asset Allocation:  Major economic cycles can alter the investment environment.  These include business expansions and recessions, stock market bull and bear cycles, and significant interest rate fluctuations.  Some of these cycles can last for several years.  Since this changing environment affects portfolio performance, it is often appropriate to adjust the asset allocation to accommodate the current environment.  Usually this is achieved by using an investor's strategic asset allocation as a reference, and then making relatively small adjustments (say up to +/- 25%).  This tactical allocation changes with the economic environment.  Again, periodic rebalancing is necessary to correct the market driven imbalances.