At First Wealth Management we start with the basic understanding that investing is not an exact science. We also know that our clients have varying investment objectives, financial capabilities and risk tolerances. With all this in mind, we endeavor to maximize the total return based on mutually acceptable goals and objectives.
The goals and objectives must be established at the inception of the account relationship and then continuously reviewed for all changing circumstances. Performance is directly related to how well we have defined the client’s needs and our ability in developing an investment program to meet those needs.
Investment management is a combination of a number of different factors:
Asset Allocation is the process of determining the most appropriate asset mix for a specific portfolio or customer’s situation. This process is driven by the client’s risk posture, funding requirements, cash flow or liquidity needs, and long-term historical studies on projected volatility and return characteristics. Finally, the most appropriate, or optimal, asset mix is formulated within the risk tolerance guidelines established.
Fixed Income Investment Philosophy
We manage fixed income portfolios with the primary objective of producing income, while at the same time protecting principal and keeping market value volatility to a minimum. To accomplish these objectives, we utilize a combination of U.S. Treasury and Agency securities, along with exposure to investment grade quality corporate bonds. Due to the recent turmoil within the credit markets and the increased awareness of specific company risk, we have begun utilizing an exchange-traded fund (ETF) for our corporate bond exposure. This has provided our customers with increased diversification within the corporate bond portion of their accounts, while at the same time maintaining comparable yields. The use of an ETF has also improved the overall liquidity for our customers, particularly during times of turmoil within the credit market. For customers whose tax brackets provide them the benefit of generating tax-free income, we purchase high-quality municipal (tax-free) bonds in an effort to maximize their net after tax yield.
We continually monitor economic conditions, both in the U.S. and abroad, in an effort to gain insight into interest rate trends. However, we also understand that it is extremely difficult, if not impossible, to accurately predict future interest rates. As a result, we structure our fixed income portfolios using a laddered maturity schedule, with the maximum maturity based on the needs of the specific account. This approach helps reduce reinvestment risk, which is the risk of having a large percentage of the portfolio coming due during the same period of time and having to reinvest it during a low cycle in interest rates. The average maturity of our fixed income portfolios is typically in the four (4) to seven (7) year range. When making new purchases, we take into consideration the current interest rate environment and our future interest rate projections to determine where on the maturity spectrum to buy.
We currently are managing our “taxable” fixed income portfolios with a 50/50 balance between U.S. Government securities (i.e. Treasuries & Agencies) and corporate bonds. The composition will be adjusted periodically, depending on our view of current and expected economic conditions, and the related risk premiums for each asset class.
In addition to the above, we are also in the process of evaluating the use of other fixed income asset classes (eg. inflation-indexed securities, foreign bonds, and high-yield bonds) within our fixed income portfolios in an effort to enhance returns, while at the same time keeping our risk exposure within tolerance levels.
Equity Investment Philosophy
We believe the cornerstone of successful equity investing is to manage equity accounts with a long term perspective and to not become overly concerned about short term market fluctuations. With that in mind, our policy is to structure our customers’ equity portfolios using a combination of securities designed to produce long-term results that, at a minimum, provide above average returns relative to the general market.
We are not proponents of market timing. As a result, we are firm believers that fully invested positions, once established, should be maintained throughout market fluctuations, with rebalancing to take place on an as needed basis. As a general rule, we implement a dollar cost average approach when investing new funds into the equity markets. This approach helps mitigate the risk of buying into the equity market at the most inopportune time.
Over the years, we have utilized a variety of equity securities within our accounts, including individual stocks, mutual funds and exchange traded funds. Our investment staff continually monitors the ever-changing economic and market conditions, as well as, current and developing investment practices and related securities in the marketplace. We are always researching and evaluating ways in which we can improve our equity management and will adapt to changing conditions as warranted.
As an example, prior to 2005, we managed our equity accounts predominantly through the use of individual stocks. As specific company risks continued to increase, we decided to place a greater emphasis on diversification within our equity accounts, which in turn caused us to reevaluate the appropriateness of using individual stocks. During this time, exchange traded funds (ETFs) were continuing to grow significantly in terms of volume, market share and types of funds, providing portfolio managers with an excellent vehicle in which to obtain broad or specific market exposure. We made the decision to begin utilizing ETFs in our equity accounts beginning in 2005 and have since transitioned the majority of our accounts to them.