Diversification & Investment
Portfolio Design

Financial Advisor Tim Hayes

As markets are wont to do, last year’s poor performers——reversed course and are this year’s winners, reaffirming that the one free lunch available to investors is diversification.

Diversification is the proverbial don’t put all your eggs in one basket. So within an asset class like bonds, a diversified investor owns treasury bonds, corporate bonds, high-yield bonds, and international bonds, benefiting from the fluctuations from year to year in returns.

So while diversification is about the eggs, asset allocation is about the basket. What percentage of your basket is going to be in stocks and bonds? For example, if six years ago you were comfortable with an asset allocation of 60% in stocks and 40% bonds, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing simply puts your asset allocation and its risk level back to the original 60/40.

Rebalancing Your Portfolio

Because the stock market is significantly overvalued at this time, now is an excellent time to consider rebalancing your portfolio. By rebalancing instead of selling what has gone down or buying what has gone up, investors remain diversified but go back to their original allocation.

For example, if 10 years ago you were comfortable with a portfolio of 60% in stocks and 40% bonds, now, after the doubling of the stock market, that portfolio might be 75% stocks and 25% bonds. Rebalancing simply puts the portfolio and its risk level back to the original 60/40.

Retirement Accounts Are Ideal for Re-balancing

Because they enable you to buy and sell within the account with no tax consequence, and usually no fee or commission.

Investors approaching retirement who fail to rebalance might unwittingly end up closer to retirement with a riskier portfolio. That is why, when such investors rebalance, they might want to update their targeted allocations. For example, an investor with a portfolio that was 60/40 five years ago and now 75/25 could rebalance to 35% stocks and 65% bonds.

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Investment Portfolio Design

Recommend investments, based on an explicit balance of growth vs. security

Step 1: Review Your Current Investments

I use fi360’s Proposal Report™ to compare your current holding to a portfolio developed from your risk tolerance. The review can Include all of your accounts: 401(k), IRA, 403(b), annuities, brokerage accounts, mutual funds, stocks, bonds.

  • Executive Summary — Overview of the proposal, our firm, and the services we offer
  • Holdings Summary — present the allocation of your proposed and current investments
  • Style Analysis — by U.S. equity, international equity, and fixed income
  • Portfolio Performance Analysis — compare the performance of your current and
    proposed investments
  • Fee Analysis— current vs. proposed
  • Risk Tolerance Report 
  • Closing comments and items for your consideration
Diversification and Investment Portfolio Design

Whether you’re looking to change jobs, shifting gears into retirement, or already participating in a investment plan at work (401(k), 403(b), etc.), you owe it to yourself and your family to make sure you’re doing the right things at the right time.

Step 2: Risk Tolerance

Step 3: Mutual Fund Due Diligence

Psychologist Daniel Kahneman won the 2002 Nobel Prize in Economics for bringing to light that people hate to lose money more than they like to make money. Aversion to losses is one reason I ask you to measure your risk profile online at FinaMetrica. I would not want you to be holding a portfolio that is 80% stocks, which might lose 30% in a bad year, when your profile indicates that you would sell everything if it dropped even 5%.

For others, the opposite is true. You might need to take more risks to reach your financial goals. As you financial advisor, I need to alert you and give you options: take more risks, save more money, diversify your investments more, etc. Obviously, each client’s individual risk profile must be respected.

Investing In an Overpriced Stock Market

I screen 10,000+ funds down to a couple hundred eligible for use in your portfolio. The process screens for manager tenure, fees, performance, and style.

I cross-reference my results with fi360’s Fiduciary Score. That score is an easy-to-use use and easy-to-understand method for objectively comparing peer investments and determining their overall appropriateness.

It is a ready-made solution for due diligence that can help advisors show a careful investment choice and monitoring process.

Step 4: Account Size

Bigger Accounts

The client needs a minimum of $100,000. It can include just about any account: IRAs, 403bs, joint accounts, personal brokerage accounts, etc.

  • The fee charged depends on the size of your account and the complexity of your asset management but it is never greater than 1%.
  • The accounts are primarily invested in mutual funds and exchange-traded-funds (ETFs). All the funds have passed my rigorous due diligence process.
  • I design the portfolio to meet your goals consistent with how much risk you are comfortable taking.
  • After the account is set up you receive monthly statements and you can follow your account online with CirStatements.
  • We periodically meet to check the portfolio and to discuss performance and re-balancing and to check if you are on track to meet your goals.

If you don’t have $100,000 to invest

Because my fee-based accounts need a minimum of $100,000 if you have less than this to invest I usually charge a commission or an hourly rate.

  • However, I use the same due diligence process for building your portfolio. I use mutual funds and exchange traded funds (ETFs) that have passed my due diligence process screening for low fees, historically competitive performance, low fund turnover, and long manager tenure.
  • I work with all types of account registrations: IRAs, Roth IRAs, 403(b)s, SEPs, SIMPLES, 529 Plans, etc. After the portfolio is set up, you receive monthly or quarterly statements, and you can follow your account online at CirStatements.
  • The custodian for the accounts will be either Pershing, a Bank of New York Mellon company or directly with the fund family.
  • Periodically we meet to check if the portfolio is on track to meet your goals and to check performance and discuss rebalancing.

Past performance is no guarantee of future results. All investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Diversification and asset allocation strategies do not assure profit or protect against loss.

If you're concerned about your financial future, lets talk