Building an Ideal Conservative Investment Portfolio: A Comprehensive Approach
Investing in the right portfolio is crucial for long-term financial success. It requires careful consideration of various factors, including diversification, factor exposures, bond quality and duration, expenses, taxes, and ethical alignment.
In this blog post, we will explore the key elements to look for in an investment portfolio to ensure optimal returns while staying aligned with your conservative values and ethical beliefs.
Diversification: Spreading Risk Wisely
- Diversification is a fundamental principle of investing. A well-diversified portfolio may reduce the risk associated with individual investments by allocating resources across different asset classes, sectors, and geographies. A diverse portfolio may also mitigate the impact of market volatility and helps protect against potential losses. When evaluating a portfolio, analyze the range of assets it holds and ensure there is a healthy mix of stocks, bonds, real estate.
Factor Exposures: Identifying Drivers of Returns.
- Factor exposures refer to the underlying characteristics that drive investment returns. Common factors include value, growth, size, profitability, and momentum. Understanding the factor exposures in your portfolio can help you gauge how it may perform under different market conditions and, more importantly, over the long term. Consider analyzing the portfolio’s exposure to various factors and ensure they align with your investment goals and risk appetite.
Bonds: Short Duration and High Credit Quality
- Bonds can play a vital role in diversifying a portfolio and reducing its overall risk. When evaluating the bond portion of a portfolio, two key factors to consider are duration and credit quality. Short-duration bonds are typically less sensitive to interest rate changes, reducing the impact of rising rates on the portfolio’s value. Additionally, high-credit-quality bonds typically provide greater stability and lower default risk. Ensure that the portfolio holds bonds with favorable duration and credit quality characteristics. Constitution Wealth believes that bonds are an inferior source of risk-adjusted returns to stocks. Therefore, the proper role of bonds, in our opinion, is to reduce portfolio volatility (the ups and downs) during difficult times.
Reasonable Expenses: Maximizing Returns
- The expenses associated with managing an investment portfolio can significantly impact your overall returns. Higher expenses can eat into your investment gains over time. Look for portfolios with reasonable expense ratios, which reflect the percentage of assets deducted annually to cover administrative and management costs. Compare the expenses of different portfolios and opt for ones that offer a balance between cost and value. Make sure that the expenses you are paying are delivering the value you expect.
Taxes and Turnover: Minimizing Costs
- Taxes and portfolio turnover can erode investment returns. High turnover can generate taxable events, resulting in increased tax liabilities. Consider portfolios with low turnover, as they tend to generate fewer taxable events. Additionally, explore tax-efficient investment strategies, such as tax-loss harvesting or utilizing tax-advantaged accounts like IRAs or 401(k)s, to minimize the impact of taxes on your portfolio. Low turnover also decreases trading costs, which may increase returns.
Values and Ethical Alignment: Investing with a Purpose
- Investing in alignment with your values and ethical beliefs is becoming increasingly important for many investors. Consider portfolios that integrate conservative values screens or factors into their investment approach. Look for companies with strong ethical practices and a commitment to individual freedoms. Investing in companies whose values align with your own not only provides financial returns but also creates a positive impact on society.
Conclusion
Constructing an investment portfolio that meets your objectives requires careful consideration of several key factors.
A diversified portfolio with appropriate factor exposures, short-duration and high credit quality bonds, reasonable expenses, low taxes and turnover, and ethical alignment can provide a strong foundation for long-term financial success.
Take the time to evaluate these elements when choosing your portfolio to maximize returns while staying true to your patriotic values and beliefs. Remember, investing is a journey, and periodic portfolio reviews and adjustments are necessary to ensure it remains in line with your evolving goals and market conditions.
Who’s Managing your Shareholder Vote?
Did you know that when you buy a share of stock, it comes with a vote?
You can show up at shareholder meetings and vote (even speak to management), or you can use an easier method called a proxy vote.
Proxy voting is a mechanism that allows shareholders of a company to vote on corporate matters without physically attending the shareholders’ meeting. Instead, shareholders can appoint a proxy to vote on their behalf. The proxy can be an individual, such as a friend or family member, or an institution, like a mutual fund, ETF, or pension fund.
When a company issues a proxy statement before a shareholders’ meeting, it includes details about the issues to be voted upon and provides shareholders with voting instructions. Shareholders can review the proxy statement, make their voting decisions, and then authorize their proxy to vote accordingly.
This can be done through various methods, such as completing a proxy card, voting online, or providing written instructions.
Proxy voting is important for several reasons:
- First, it allows shareholders who are unable to attend the meeting, either due to logistical constraints or lack of time, to still participate in the decision-making process. It ensures that the voices of all shareholders are considered, regardless of their physical presence.
- Second, proxy voting empowers individual shareholders by giving them a say in matters that affect the company’s governance and direction. This could include ESG initiatives, diversity equity and inclusion (DIE), critical race theory (CRT), political involvement that may run counter to the interests of shareholders. By exercising their vote, investors can express their support or opposition to proposals such as electing woke directors, approving race and gender based quotas, executive compensation, or approving mergers and acquisitions. This helps shape the company’s decisions and holds management accountable.
- Furthermore, proxy voting is crucial for maintaining a healthy corporate democracy. It promotes transparency, accountability, and checks and balances within a company. When shareholders actively participate in voting, it reduces the risk of decisions being made without proper oversight, and it encourages responsible corporate behavior.
Most investors are not even aware of this important responsibility.
In fact, they are delegating this power to fund companies and brokerages without realizing it. Many of these firms hold left-wing extremist views, in our opinion, and are using their client’s votes to push unethical social policies via your investments.
What can you do about it?
First, you can vote your proxies by informing your brokerage of this desire. It’s usually a form to fill out. This will work for shares you own directly. It won’t work if you own your investments inside mutual funds or ETFs.
Those votes will be exercised by the fund companies themselves and you have no direct say in the proxy voting. Be sure that your funds are managed by people whose values are aligned with your own. If they aren’t aligned, you may wish to sell the fund and buy something else.
The other option is to work with an investment advisor who is attuned to your values. Your advisor can then, at your direction, vote your proxies for you and/or choose fund companies who have a world view close to yours.
This will save you time and give you a potentially louder voice when your vote is combined with other shareholders with whom the advisor works.
In summary, proxy voting enables shareholders to participate in corporate decision-making by appointing a proxy to vote on their behalf.
It is important for investors to exercise their vote as it allows them to have a say in company matters, influence corporate governance, and promote transparency and accountability.
Should I Invest in Gold?
Gold, all the Risk of Stocks with the Potential Return of Bonds.
Because many of our new clients come from radio ads, they are constantly bombarded with messages from companies who sell gold investments. So, we’d like to address gold as a primary investment for a retirement portfolio.
Many people have considered Gold a store of value and a safe haven asset for many years, but is investing in gold with a majority of your money a wise decision? In this post, we will discuss why a gold-dominated portfolio is un-diversified, the long-term returns of gold compared to other investments, the current amount owned in a stock portfolio, and why, in our opinion, gold falls into the category of speculation rather than investment.
Firstly, a gold-dominated portfolio is un-diversified.
Diversification is a fundamental concept in investing that involves spreading your investments across different assets in an effort to reduce risk. The rationale behind this strategy is that if one investment performs poorly, the other investments in the portfolio may be able to offset the losses.
However, if a significant portion of your investment is in gold, you may be exposing yourself to unnecessary risk. We like to think of growing money over time as about smooth returns, triples and doubles, not home runs. That’s because, mathematically, recovering from a major price decline is incredibly difficult as compared to a portfolio that never suffers a massive decline. You may never get out of the hole, so-to-speak.
Here’s an example:
What return would you need to recover from a -50% decline? Most people would say that a 50% return would do it. But that’s not right. You would need a 100% return just to get back to even. What are the odds of that?
Secondly, equity investors are most likely already exposed to gold prices via the companies they own.
Businesses such as manufacturers and jewelry companies own huge quantities of gold used in their normal course of business. The question is: why would you want to own even more gold?
Lastly, we believe gold falls into the definition of speculation rather than investment, unlike stocks or real estate.
Gold is not like stocks or real estate, which can provide earnings in the form of rent and dividends. As such, investing in gold is more like speculating on its price than investing in an asset that more likely has the potential to generate earnings over the long term. We believe that one’s nest egg should be invested rather than speculated upon.
In conclusion, we think that investing in gold with a large portion of your money is a bad idea. A gold-dominated portfolio is un-diversified, and gold offers lower long-term returns similar to bonds with higher risk similar to stocks. Furthermore, stock investors are likely already invested in gold via the manufacturing and jewelry companies they may own. Gold also falls into the category of speculation rather than investment, in our opinion, as it produces no expected earnings or net income.
While gold may be a valuable asset to own as part of a diversified portfolio, we do not believe it should be the main focus of your investment strategy. Instead, investors should consider investing in a broadly diversified mix of assets (stocks, bonds, real estate, cash) that aims to provide them with the returns they need to meet their long-term financial goals.
The Secret Sauce of Financial Advice
Many people view personal financial planning as simply a means to an end: the end being a comfortable retirement or a large investment portfolio.
While there is some truth in the above statement, the true benefit of financial planning is not the investment advice or number crunching, but rather the process of goal setting.
Behind every great sports team and behind every great player was a great coach.
Why? Why do the very best athletes in the world use coaches? Mike Tyson, Tiger Woods, Roger Federer, and Tom Brady all use multiple coaches, despite the fact that they are the best at what they do.
Answer: because they are better with them.
Financial Planners work with their clients to set clear, measurable financial goals and create plans to achieve them. This is the key to successful financial outcomes.
A professional financial advisor can play a crucial role in this process by helping you set realistic goals, track your progress, and hold you accountable to your plan. “I have seen the enemy, and it is I.” said Pogo.
We all need help identifying what is important to us and staying focused on it over time.
By defining our financial goals, we are able to focus on the end result and work backward to create a plan that will get us there. For example, if our goal is to save enough money for a down payment on a house, we know how much we need to save and can work out a budget to make it happen.
On the other hand, if we simply focus on saving money without a specific goal in mind, it can be difficult to stay motivated and on track.
Writing down goals also helps to make them real and concrete. It’s one thing to say “I want to save money”, but it’s another thing entirely to write down “I want to save $200,000 for a down payment on a house by the end of the year”.
By putting our goals in writing, we are far more likely to take them seriously and commit to achieving them.
Working with a professional financial advisor ensures that you have an unbiased perspective and helps you navigate the often-complex world of personal finance.
They can also give you valuable advice on how to reach your goals and help you adjust your plan as your life circumstances change.
How to Execute on Values Driven Investing
Assuming that you have decided to make values-driven investing part of your investment process, how do you actually do it? There are four main methods that we’ll discuss here. 1. Do it yourself. 2. Use funds. 3. Use a separately managed account. 4. Use a combination of all three.
You can certainly purchase, or not, their individual stocks and bonds. Your decisions will increase or decrease the price, therefore raising or lowering the cost of capital for the business/government. (This will lower investor returns) This method gives you the most control because you can choose, or not, each individual company. Unfortunately, it does come with the added burden of researching and choosing the investments as well as monitoring all the securities over time. This can be a burdensome task.
Additionally, unless you are VERY wealthy, you will not have enough money to significantly impact their behavior by influencing the stock price. You just don’t have enough capital to push the price up or down enough.
Another alternative is to use a values-focused fund such as an ETF or mutual fund. While you won’t have as much control, you and all your like-minded investment partners will speak with a much louder voice. Why? Because you are pooling your money now, you can move the price. You can also use the media to shame and otherwise influence the investees into acting right. The fund will also monitor the investment potential as well as the ethical behavior of your portfolio. This method gives you the least control, but the most impact.
A third choice is to use a separately managed account where you can set the specific tone for the values decisions question (No on abortion but yes on energy security, family values, 2nd Amendment, and border security, for example) and have the ability to specifically exclude certain companies/countries from your portfolio. This option may give you the best of both worlds because you can participate in the larger values-based initiatives (Larger voice, PR, etc.) of the firm you are working with, yet have much of the control you would have choosing or boosting specific companies or governments. It’s the middle path.
Finally, you can blend the three in a way that lets you have the best chance for your desired outcome. If you have no time or expertise, forget doing it yourself. You may even want to delegate it all to a fund rather than a customized separate account. If you have some time and expertise you may want a small account you invest yourself combined with some funds and/or a separate account. You can customize these three methods to your preferences, wealth, and abilities.
In summary, the four approaches are, do it yourself, use a fund company, use a separately managed account with specific client input, or use all three. Using all three is going to make more sense for wealthier households.
Don’t wait, get started matching your values to your investments today!
Why Investing is like Panning for Gold
One way to find gold is to pan for it. You take the silt and sand from the bottom of a river, usually up in the mountains where gold seems are exposed, and you scoop it up in a pan. Then you swirl the material around until the heaviest particles (usually gold) separate from the other materials. You can then extract the gold from the pan in its purified form.
You could just load up all the sand and silt and take it off to the mill to be processed. But that would be very expensive and wouldn’t produce what you were really after, pure gold, very easily.
Building an investment portfolio requires a similar process. Somehow, we must refine or filter the approximately 43,000 globally publicly listed securities down to an investment strategy that best meets our financial goals (If you included non-traded investments the number of choices is astronomical so let’s decide to stick with listed securities because they are liquid and subject to constant market scrutiny). Each investor is unique.
Each investment situation is unique. So we must have a framework of decisions to winnow down the global investment market to suit us. The below discussion is an example of how we winnow down our investment choices.
Just like hauling off all of the river sand, we could buy all global stocks fairly easily and cheaply using a global index fund or three. That actually might not be a bad portfolio.
You’d have maximum diversification, which is generally a good thing, and fairly low costs. Just like our gold speculator, however, you as an individual might have some needs and preferences that would benefit from eliminating some of these global investments in exchange for different portfolio characteristics. You’d be trading less diversification for some benefits.
Let’s talk about some of those trade-offs.
The first and probably most important one would be your ratio of stocks to bonds. The global portfolio is typically bond heavy. You may be about 60% bonds which might not be the best idea if you were say, a 25-year-old investing for retirement. If that were you, you’d probably prefer little if any bonds in your portfolio because you may not need the safety bonds generally provided. Retirement is far off in the future and youth is the time to take smart risk.
So, eliminating stocks or bonds from the “buy everything” approach is first. Delete bonds to take on more risk, delete stocks to take less risk.
What if you wanted higher expected returns for your stocks? Well, there are some things we know about stocks that may help us increase expected returns in your portfolio.
Risk is related to return. So, how can we favor companies that are riskier individually but, via diversification, aren’t too risky for us as investors?
Small companies often have higher expected returns than big ones. Why? Risk. Small companies tend to fail more often so investors require more returns to invest in them.
Value (or struggling) companies have higher expected returns than growth (or great) companies. Huh? You are saying that struggling companies like Kmart have higher expected returns than Amazon? Yes, because risk is related to return and Kmart is riskier (They are flirting with bankruptcy).
One more screen we might use for stocks is profitability. It turns out that the many profitable firms today tend to generate high expected returns in the future.
Now, for the bond side of your investment portfolio. Bonds are typically not a great source of risk-adjusted returns. As bond maturities go up, so does return, but not nearly as much as risk. Bonds become very price volatile as they respond to changes in interest rates. We like to invest in short-term bonds only (5 years or less) and buy longer-term bonds only when the interest rate they offer is significantly higher (A steep yield curve).
Corporate bonds also pay investors for taking the underlying risk of the company. Really risky bonds (junk bonds) don’t offer a return commensurate with their risk, in our opinion. So we like to buy investment quality bonds only. And, we like to buy lower quality bonds when we are offered the opportunity for significantly more return (This is called high credit spreads).
So, generally, we see bonds as a source of safety, not as a great source of real returns. We like to buy only short-term, high-quality bonds aimed to stabilize the portfolio in good times and get our long-term returns from stocks.
We aim to have a stock portfolio that’s smaller, cheaper, and more profitable than the market. We aim to have a bond portfolio that’s shorter term, and higher quality than the market. We also aim to have a mix of stocks to bonds that is right for a life stage.
What about values?
Is it important that my investments match my values? Should I avoid or reduce my investments in companies whose ethical behavior is not aligned with my own? Are the companies I’m investing in aligned with me on the environment, social justice, politics, religion, healthcare, animal welfare, gambling, smoking, abortion, pornography, drugs and alcohol, and family?
If not, you may wish to eliminate, or reduce investment, in companies that don’t line up with your values.
So, now I aim to have a smaller, cheaper, more profitable stock portfolio to give me higher expected returns. I aim to have a shorter-term, higher-quality bond portfolio to stabilize my account during the tough market conditions. And, I’m investing in companies whose values align with my own.
By using a filtering princess akin to gold panning, you may improve your expected investment experience considerably by giving up some diversification in exchange for portfolio characteristics more aligned with your needs and preferences.
