Investment Philosophy
Importance of Time Horizon and Asset Allocation
The most important investment decision is the allocation mix between stocks and bonds. Investors generally face the “Investor’s Dilemma” of accepting higher volatility from stocks to pursue higher returns or accepting lower returns from bonds to pursue lower volatility.
While past performance is not a predictor, market history shows that stocks have earned significantly higher returns than bonds with significantly higher volatility. An investor’s time horizon is a critical factor in determining the appropriate asset allocation mix. The higher volatility of stocks makes them less suitable if funds are needed soon, whereas, in the long run stocks are likely to produce better returns even in worst-case scenarios.
Envision’s approach to solving the Investor’s Dilemma is truly unique.
Envision’s Proprietary Monte Carlo Model
While virtually any investment advisor acknowledges that asset allocation is the most important investment decision, the more important question is likely, “Can my nest-egg sustain me throughout my retirement years?” Candidly, many advisors drop the ball when it comes to answering this question. Many rely on risk tolerance questionnaires and rules-of-thumb based on age to recommend asset allocation. Others use Monte Carlo modeling software to project retirement cash flows. Conventional Monte Carlo tools generate voluminous reports with fancy charts, but we’ve found that the inputs and methodologies are questionable to say the least. Many Monte Carlo tools use unrealistic rates of return and fail to consider investment expenses. Many fail to recognize that, as investors age, stocks may become less suitable over time. As such, Monte Carlo tools that fail to adjust asset allocation over time likely project unrealistic future investment growth rates.
Envision has built a proprietary Monte Carlo modeling tool that adjusts clients’ asset allocations over time, reflecting the likelihood of declining risk tolerance with age. Rather than relying on historical investment returns, Envision utilizes conservative return assumptions based on long-term forward-looking forecasts and includes estimated investment expenses to provide realistic context for a range of possible retirement outcomes.
Diversification and Tactical Allocation
Envision pursues diversification to reduce portfolio volatility to the extent possible. This includes broad-based exposure to sectors of the global markets by allocating to asset classes within stocks (e.g. US vs. foreign, large vs. small, growth vs. value, etc.) and bonds (Treasuries vs. corporates, municipals vs. taxable, portfolio duration/maturity, credit quality and spreads, portfolio composition, etc.).
Envision tactically implements allocations based on the current market environment and outlook. Our ongoing research leverages extensive institutional research from various industry-leading firms and strategists. From this we formulate our strategy on an ongoing basis and proactively implement positioning within client portfolios.
Investment Vehicles
Envision employs a combination of passive and active strategies within client portfolios. This includes investments within Exchange Traded Funds (ETFs), mutual funds, and separately managed accounts, as well as the use of individual US Treasury securities and FDIC-insured CD’s as appropriate.
Passive funds attempt to mirror market indexes (e.g. S&P 500, Russell 2000) by replicating or sampling such indexes. The rationale for passive investing is that investors can earn market returns while incurring lower expenses. While the goal of active funds is to “beat” certain market indexes, many fail to do so after deducting fund expenses. In less efficient markets, active funds may produce incremental returns that justify their higher expenses. Additionally, active funds with unique styles may produce low correlation to market returns, enhancing portfolio diversification.
Envision believes that both active and passive strategies play a role in client portfolios. Our focus is on delivering the best portfolio strategies to help our clients succeed in achieving their goals and objectives.
Systematic Rebalancing
Envision monitors clients’ portfolio allocations weekly relative to targets. Portfolio rebalancing is generally pursued to promote a “buy low, sell high” philosophy and avoid emotional impulses to “chase” markets based upon momentum (which may result in buying or selling at the least opportune time). It is important to maintain discipline in investing and rebalancing. Hence, Envision is proactive in monitoring regularly and rebalancing when appropriate.