A Balanced Account is designed to combine the capital appreciation and growth potential of an equity portfolio with the predictable, income-producing characteristics associated with a portfolio of fixed income instruments. Balanced Accounts tend to be less volatile than all-equity investment accounts, by virtue of the stabilizing effect of the fixed income sector. They generally underperform the major stock indices when the stock market is very strong and outperform when the stock market is weak or flat. The weightings of the various asset classes in Balanced Accounts are established and adjusted in response to changes in market fundamentals and client needs. For example, a client who is seeking more growth and has little need for current income will ave a higher allocation to equities. Alternatively, those clients that require regular income distributions and/or have a lower tolerance for market volatility will have a greater weighting in fixed income assets.
The equity (or stock) portion of balanced portfolios will be diversified across economic sectors and will emphasize shares of large- and mid-sized companies. In most cases, securities will be selected based on our assessment of their superior prospects for a term of three to five years. This long-term approach minimizes transaction costs and maximizes the tax efficiency of investing in common stocks. Tax sensitivity may be a critical element in determining the timing of security sales. While our focus is on securities of individual companies, shares of good quality 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).
Investments in the fixed income portion of Balanced Accounts will consist of government, corporate and/or municipal bonds, preferred shares and other securities (including exchange-traded and/or mutual funds) which generate current income with minimal risk. Fixed income investments will be limited to securities which are deemed “investment grade” by one or more of the established rating agencies, unless other terms are agreed upon with clients. Under certain circumstances, equity securities with fixed income characteristics, e.g., utility stocks and shares of conservatively-managed real estate investment trusts (REITs), may supplement more traditional fixed income investments. We focus on maximizing return within a low-risk framework. Cash equivalents may be held as a reserve for current cash flow requirements and to fund future buying opportunities, although, as a general rule, mature Balanced Accounts would likely have less than 15% invested in these most liquid assets.
In most cases, the time horizon for a balanced investment objective is long term. We will implement this objective gradually over time to reduce portfolio volatility due to short term movements in the broader markets. To effectively meet our clients’ needs and goals, it is critical to agree upon the investment objective before its implementation.