OUR INVESTMENT STRATEGIES
WealthPath offers two types of portfolios that are designed to help clients reach their financial goals. Our Smart Risk Portfolios have a 15-year performance track record and take a dynamic approach to asset allocation. Our Tax-Efficient Portfolios offer more strategic exposure to a wide range of asset classes and work to minimize the effects of taxation on your account. This goal is especially valuable for investors in high-income tax brackets.
Reaching your financial goals is a lot like sailing a boat from San Francisco to Hawaii.
You can plot a straight-line course and take off with high hopes, but that won’t guarantee you get to the islands. You will encounter winds and current changes that will throw your boat off course.
The same holds true for your financial goals. People often pick a few mutual funds in hopes that sooner or later they will reach their financial goals. But like the sailboat, market winds and economic currents can throw your investment strategy off course.
That’s why we believe the best approach is to constantly monitor the conditions around us, and make adaptive adjustments to keep you on course to achieve your financial goals.
Smart Risk Portfolios
We designed the WealthPath Smart Risk Portfolios to give clients a one-stop diversified portfolio that adapts and adjusts to changing markets. We are proud of our performance track record and history of helping clients navigate the markets.
Our investment process, although sophisticated in its implementation, is simple in nature - we invest in the areas of the stock market showing strength and avoid areas showing weakness. This approach gives us the potential to take advantage of opportunities in up markets, and reduce risk in down markets. We monitor trends in market sectors based on company size and style and over and under-weight certain sectors, based on those trends.
This quantitative methodology – which we call “Dynamic Asset Allocation” – means our decisions are based on well-defined procedures and formulas. This removes the subjectivity and uncertainty of investment methods that rely on prediction and intuition.
Smart Risk Portfolio Choices
We offer five Smart Risk Portfolios, designed to meet the needs of each of our unique clients. The more conservative portfolios focus on risk management (lower volatility) by investing more in stable bonds and cash. The more aggressive portfolios invest more in stocks with a goal of higher long-term returns.
Because we designed our five smart risk portfolios to provide a given level of risk (stock exposure) over time, we don’t enter or exit the market based on guesses of future stock returns. History has shown few if any investment managers can do that well.
Investments, Diversification and Costs
To provide exposure to stocks and bonds, we use low-cost, indexed mutual funds or ETFs inside our investment portfolios. Each fund usually holds hundreds – sometimes thousands – of individual stocks or bonds, so clients are provided diversified exposure to a broad range of investments, effectively reducing the risk that one bad stock or bond will drag down performance.
We use index funds because they give us the advantages of high equality and historically superior long-term performance versus actively managed funds and they do so at extremely low costs.
We work hard to minimize total costs to clients, since every dollar saved in fees is another dollar that remains in client accounts and can continue to grow over time. As an example, we customize the ETFs and mutual funds we use for each account’s custodial firm based on available fund quality and transaction costs. Because most account custodians offer some transaction-free ETFs, most of our trades have no transaction costs.
We manage our portfolios so that there are no front/back loads, no termination fees, and no time commitments. You are free to add or remove money on any day, and have full online access to view your account balance and holdings at any time.
SMART RISK Portfolio Performance History
Since 1999, our experience and rigorous methodology have given investors a track record of performance that we are very proud of. We use an independent performance verifier to calculate our returns each quarter.
For investors with relatively high levels of annual income, it can be especially beneficial to structure a portfolio to be as tax-efficient as possible. For this type of investor, we also offer 3 tax-efficient portfolios. These portfolios use what are referred to as “factor tilts” to invest more money in areas of the market that have shown to outperform over multi-year time horizons, such as low volatility stocks, value stocks, smaller stocks, or under-valued countries. In an effort to control portfolio risk, these portfolios invest in a wide array of stocks and bonds including developed market foreign stocks, emerging market stocks, foreign bonds, and a small allocation to alternative investments that provide added portfolio diversification.
Because our Smart Risk portfolios are nimble with respect to reacting to trends, they tend to hold stocks for periods less than one year. Federal tax law places a higher tax on the gains for investments in taxable accounts that are held less than one year. For investors or trusts paying up to a 39.6% tax on those gains, it can be a big advantage to avoid paying those short term capital gains taxes by holding everything in the account for a minimum of one year and paying a lower 15-20% long-term capital gains tax rate. Our tax-efficient portfolios do just this and incorporate other strategies such as tax loss harvesting, federal tax-free municipal bonds, and “factor tilts” or “smart beta” strategies to attempt to increase long-term after-tax returns. We offer 3 tax-efficient portfolios with varying risk levels: Aggressive, Moderate, and Conservative, which are differentiated by the approximate amount of stock exposure in each portfolio (80%, 60%, or 30%, respectively).
Tax savings don’t come just from longer holding periods for the funds. We also gain some tax efficiency by using ETFs rather than mutual funds for our stock exposure. Because of the way ETFs trade on an exchange, they are often more tax efficient than mutual funds, since purchases/sales of ETF shares generally don’t require the fund manager to purchase/sell stocks or bonds, since the institution creating or redeeming those shares often does that for them. This lowers internal trading costs for the ETF company and offloads stocks or bonds with a low costs basis (lots of accumulated gains) to the institutions that sell large blocks of ETF shares.
Another potential for tax savings in these portfolios comes from usage of municipal bonds. Municipal bonds are issued by states and local governments and the interest earned on them is federal tax free. For example, if you are in the 35% tax bracket, $100 of normal bond interest would result in paying $35 in federal taxes on that interest. If that $100 in interest came from a municipal bond, there would be no federal tax due. State income taxes may still be due in both cases. We analyze the interest rates on municipal bonds and may invest in them when they will result in an after tax yield above the rate that similar non-municipal bonds are paying.
A final way we control taxes for these portfolios is via tax loss harvesting. At least once per year, we will analyze the portfolio and look at what positions have gains and losses. If we plan to sell any positions with gains, we will also try to sell any positions that have losses, when appropriate. When you have gains and losses in the same year, those two amounts can cancel each other out, so that no tax is due once we net both amounts together. Some years, there will not be enough losses to cancel out all of the gains, and in other years the opposite might be the case.
Tax-Efficient Investment Selection
Many of the investments in these tax-efficient portfolios attempt to take advantage of long-term historical factors in the markets that tend to lead to outperformance. For example, weighting stocks in an index by their size (“cap weighting”) is the most common method, but has generally underperformed other ways to weight the stocks. We integrate alternative weighting styles that have tended to outperform, such as value weighting, economic value weighting, low-volatility weighting, etc. We also include a selection of foreign stocks and bonds, municipal bonds, high-yield bonds, and other asset classes since they tend to perform slightly differently than US stocks and bonds, and tend to lead to better risk-adjusted portfolio returns, over the long term.
We also invest a small percentage of each tax-efficient portfolio (usually 5-15%) in alternative investments that provide even more diversification. These allocations may include merger or convertible arbitrage funds, managed futures funds, commercial real estate companies, and deep-value investments in foreign stock markets that look especially under-valued, relative to other foreign countries. All of these investments are made via standard mutual funds and ETFs that don’t have any significant asset lockups, redemption fees, front loads, etc.