Investment risk takes various forms and comes from many sources. From volatility of returns, to the potential for permanent loss of capital, and ultimately to the failure to achieve a client’s goals — the transforming landscape of investments places a premium on an advisor’s ability to evolve and manage risk. As trusted stewards of our clients’ wealth, we are well aware that we live in a world of increased market risk — one that is shifting from that of high return and low risk to just the opposite — higher risk and lower return.
The past decade of extraordinarily low interest rates and below-trend economic growth, combined with full equity valuations, has investors challenged to meet their investment objectives without taking on undue risk.
As the investment landscape changes, we realize that clients have more choices. From the variety of investment products and cost structures to new technologies and regulation, the value proposition is more important than ever before. At Pennsylvania Trust, we believe a thoughtful asset allocation process and disciplined portfolio construction are the keys to maximizing the likelihood of success and ultimately bringing our clients closer to achieving their goals.
A thoughtful allocation process and disciplined portfolio construction are the keys to maximizing the likelihood of success.
Asset allocation refers to the distribution of assets among various asset classes based on a client’s time horizon, risk tolerance, investment goals, and individual preferences. Asset allocation, while being a main driver of total returns, also helps to limit risk and reduce the portfolio’s volatility. While there is no uniform solution to asset allocation, it is imperative that customized decisions about optimum asset allocation are made to help clients achieve their financial goals. They must be periodically reviewed as well.
At Pennsylvania Trust, our process begins by focusing on three main concepts: setting investment objectives, understanding investment risks and minimizing investment drag.
- Setting investment objectives requires a thorough understanding of a client’s needs and goals.
- Understanding investment risks requires a thorough understanding of the different forms risk can take and how to manage risk with asset allocation and portfolio construction.
- Minimizing investment drag requires a thorough understanding of how both fees and taxes can be budgeted efficiently to meet client goals and expectations.
Regardless of whether the investments are in individual stocks, bonds, ETFs, and/or funds, our portfolio construction relies on an unbiased process for analyzing the available options. Once an asset allocation strategy has been selected to meet risk and liquidity parameters, the portfolio construction process looks at individual client personal goals and restrictions. During this process we may occasionally utilize certain investments to meet ESG (Environment, Social, or Governance) and SRI (Sustainable and Responsible Investments) objectives or to address client-specific restrictions.
Achieving an ideal asset allocation is an ongoing process. Client circumstances may change which can alter the portfolio’s goals. It is important that you and your Pennsylvania Trust advisor maintain an open channel of communication to convey these changes and subsequently re-examine the allocation. Our asset allocation approach seeks an appropriately diversified asset mix to help smooth out the ups and downs of the market so that portfolios can enjoy the positive compounding of returns over time. In the end, this smoother path will be calmer on the nerves and ultimately help investors remain on course when turbulence strikes.
Jon is Senior Vice President, Director of Fixed Income and Investment Strategy at Pennsylvania Trust.
Disclosure: This Commentary represents a review of topics of possible interest to Pennsylvania Trust’s clients and is not personalized investment advice. It contains Pennsylvania Trust’s opinions, which may change following the date of publication. Information obtained from third-party sources is assumed to be reliable but is not guaranteed. No outcome – including performance – is guaranteed, due to various uncertainties and risks. This document is not a recommendation of any particular investment. Investment decisions for clients are made on an individualized basis and may be different from what is expressed here. Past performance is no guarantee of future results.