Total Account Management
We seek to achieve an above-average total return over a complete investment cycle consistent with our clients’ objectives and risk tolerances. Our goal is to maintain and grow the purchasing power of our clients’ capital over the long term. Each client’s investment objective and risk profile are evaluated in light of our market outlook to determine that portfolio’s asset allocation among stocks, bonds and cash equivalents. The asset allocation of a client’s portfolio will vary over time with changes in market valuation among asset classes and the maturation of their financial profile. This asset allocation is a key determinant in providing the optimal combination of risk and reward in an individual portfolio.
Over the past 91 years, equities (as represented by the Standard and Poor’s 500 Index) have provided an average annual total return of about 10%. About 40% of this return has been in the form of dividends and the balance from capital appreciation. For the ten years ending December 31, 2017, that annual total rate of return figure fell to an average annual gain of 8.5%. The dramatic decline in the equity market during the last half of 2008 and first quarter of 2009 took a substantial bite out of returns, as well as investor confidence. The risk in achieving the more generous, longer-term returns is the high level of volatility of stock prices, collectively and individually.
To dampen this volatility, we diversify across and within stock sectors and emphasize mid-to-large-capitalization companies with superior earnings and dividend growth potential relative to their peer group and the market as a whole. We build stock portfolios one stock at a time based on our outlook for each individual company. However, purchases and sales may reflect broader investment themes because under- and over-valuation often affects entire stock sectors. While our focus is on securities of individual companies, shares of low-cost, exchange-traded or mutual funds may be purchased for smaller accounts and/or in order to gain broad and diversified exposure to a specific sector of the market (e.g., small capitalization, international equities or specific industry stocks). Overall, we invest in companies that we want to own long term and avoid being influenced by the day-to-day gyrations of the market.
Fixed Income Management
Over the past 91 years, 20-year government bonds have provided an average annual total return of about 5.5%. For the ten years just ended, this figure rose to 6% due to a dramatic reduction in interest rates and a flight to safety by skittish equity investors. The risk in achieving these returns is less than half that for stocks. We use fixed income securities to provide a steady stream of known income for reinvestment or current use by our clients and to dampen the volatility of balanced accounts.
In managing fixed income investments, we generally restrict our purchases to investment-grade bonds, bond mutual funds and preferred stocks. Clients’ effective marginal tax rates and market conditions will determine whether taxable or non-taxable (municipal) bonds are utilized. Under certain circumstances, equity securities with fixed income characteristics; e.g., utility stocks, shares of conservatively-managed real estate investment trusts (REITs) and master limited partnerships (MLPs) may supplement more traditional fixed income investments. We balance current return with potential risk by controlling duration, distributing bond maturities along the yield curve, carefully monitoring credit quality, and diversifying among issuers and market sectors.