Our Recipe for Building Your Portfolio

by Lorri DeFoor

If you spend time looking at your statements from the investment accounts that we manage for you here at Sawston Wealth Management, LLC, you may notice that for many months of the year, there isn’t much trading happening in your portfolio. Then, occasionally, you might see several trades go through. We know for some of our clients this can lead to questions – Should there be more active trading? Why do I see trades only a few times a year? And how are the decisions being made about what I’m invested in?

These are great questions, and we’re glad you’re asking them. To provide transparency about our process, we wanted to share a little bit about our investment process, from how we initially build a portfolio for our clients, to how we monitor and manage your investments as time goes on.

  1. We start with what’s most importantyour goals, your risk tolerance, and your timeline for when you may need access to these investments (time horizon). If you think of portfolio building like meal planning, when you want to eat, the number of people you are feeding, and what you want to serve will all factor into how you approach the project. Making a cake and making chicken soup are extremely different tasks, even though they’re both done in the kitchen. As your financial advisors, it is extremely important that your investment strategy reflects your situation, so we’ll work with you individually to build that profile before making any investment decisions.
  2. We create an asset allocation strategy Once your goals are established (for the purposes of our analogy – let’s say we’ve decided to bake a cake), we can start our process of developing an investment strategy to get you there. As we build a portfolio, we start by building an asset allocation strategy—deciding on the basic ingredients we’ll need to bake the cake. But instead of how much flour, sugar, and eggs we need, we consider things like how much of your money should be allocated to stocks versus bonds, how much international exposure you should have in your investment portfolio, or what percentage of your investments should be in small companies or large companies. We may also add some extra “flavors” by overweighting certain sectors, or pulling back on some ingredients because of what we see happening in the economy or markets.
  3. We find the best funds available to build the portfolio Once we decide how assets in a portfolio should be allocated, we spend a lot of time seeking out the best stocks or funds available for our clients. It’s a process similar to going to the store and buying the ingredients for the cake, choosing from different brands and flavors according to how we want it to taste at the end. And we want nothing but the best for our clients. As fiduciaries, our process is disciplined and takes into account information about risk and return, forecasts from analysts, and other important measures of fund performance.
  4. We monitor and maintain, but we don’t overmanageWe regularly monitor the performance of our portfolios on an ongoing basis, but we are not day traders. Research supports that buying and holding your positions in high quality investments is a better long-term strategy than trading too often.1 There are tons of ways to ruin a cake even if you start with good ingredients, and most of them involve doing too much (overmixing, opening the oven door, cutting into it before it has cooled) rather than doing too little.2  We generally rebalance your portfolio twice per year, sometimes performing slight modifications on the asset allocation based on what we’re currently seeing or anticipating could happen in the economy and markets. At that time, we also do a thorough analysis of the holdings in each portfolio, and we replace funds that no longer meet our strict criteria. These are the times when you may see several trades occurring in your account. Typically, these changes are made in January or February, and again in July or August.
  5. We’re paying attention to trading feesas part of our strict criteria for choosing the best funds for our clients, we try to build our portfolios from funds that will not incur a trading fee when we buy them or sell them, and have reasonable internal expenses. In fact, our custodian, TD Ameritrade Institutional just lowered their trade costs for stocks to $6.95 per trade, matching some of the lowest costs in the industry, and most of the mutual funds we use do not incur a trade cost at all. You can rest assured knowing that we are watching your costs, and as advisors we don’t earn any additional commission from investing you in a certain fund. Our choices are guided solely by what’s in your best interest.

Investment management is an important part of what we do for our clients here, and we want you to know how seriously we take that responsibility. By following a disciplined process, we take emotional and reactionary investment decisions out of the equation, and we make sure that your investments are managed in a way that best suits your life and your goals. It’s imperative that we’re working with your most current objective, so if your financial situation or goals have changed, please let us know, and never hesitate to ask us what we’re “baking up now,” and why. We stand behind our disciplined process, and we’re always happy to explain it in more detail.


1http://www.investopedia.com/articles/stocks/08/passive-active-investing.asp
2http://www.huffingtonpost.com/2014/06/30/common-cake-baking-mistakes_n_1571776.htm

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