Investment Advisory Process
If investing is entertaining, if you're having fun, you're probably not making any money.
- George Soros, Chairman, Soros Fund Management, LLC
There is much more to investing than simply buying the next great idea. What a disciplined investment approach lacks in excitement, it more than makes up in long-term profits. The appropriate approach to investing requires a disciplined process that begins with a thorough understanding of your long- and short-term financial goals, tolerance for risk, and tax situation. Only after these items are known, can an appropriate asset allocation strategy be developed that is consistent with your unique situation. The portfolio is then constructed with specific investments to fill the proposed allocations. The process becomes continuous with ongoing monitoring, periodic rebalancing, and performance reporting.
Kalorama's investment advisory services include both planning and management. Our disciplined investment process comprises the following seven steps:
- Define Investment Objectives and Constraints
- Develop Target Asset Allocation Strategy
- Evaluate Current Portfolio Asset Allocation
- Develop Investment Policy Statement
- Portfolio Construction and Asset Location
- Portfolio Monitoring and Rebalancing
- Performance Reporting
1. Define Investment Objectives and Constraints
Each investor has a unique combination of goals, time horizons, liquidity needs, tax circumstances, risk tolerances, and attitudes towards investing. The first step in both investment planning and management includes defining your investment objectives and constraints to determine investment strategy and which types of investments are appropriate. A questionnaire is typically used to assess your objectives and constraints. Objectives and constraints include:
- Objectives — the financial goals you are seeking to achieve (retirement, education, etc.).
- Risk tolerance level — this is a measure of an investor's willingness, ability, and need to accept risk (i.e., loss of capital) when purchasing an investment.
- Time horizon — this is a measure of the amount of time available to achieve a financial goal. Typical horizons for the individual investor include retirement and life expectancy.
- Expected rate of return — the expected annual rate of return over the time horizon based upon risk tolerance.
- Liquidity — the ability to convert an investment into cash without losing principal. It would be an important consideration if you have limited assets or short-term goals.
- Marketability — the speed and ease with which an investment can be purchased or sold.
- Taxes — considerations include your tax bracket, the type and amount of cash flow (interest, dividends, short- or long-term capital gain), and the type and amount of final distribution (short- or long-term capital gain). After-tax returns should be analyzed to assess which investments are appropriate.
- Unique considerations — you may have limitations on what types of investments are suitable for your portfolio. For example, some investors would not own tobacco, alcohol, or casino companies, or international investments.
2. Develop Target Asset Allocation Strategy
Once an investor's objectives and constraints are defined, a target asset allocation strategy is developed to reflect risk tolerance and desired rate of return. Asset allocation is the distribution of investment dollars among various asset classes, such as stocks, bonds, and cash, and the diversification of investments within each of those asset classes.
The asset allocation strategy is formulated through a disciplined methodology. The first and most important step is to determine the broad portfolio balance between equity (stock) and fixed-income (bond) investments. This decision concurrently determines the portfolio's long-term rate of return and the basic level of volatility around the rate of return. The next step is to diversify the portfolio within the broad stock and bond asset classes with a strategic mix.
3. Evaluate Current Portfolio Asset Allocation
Your current asset allocation and investment positions are evaluated to determine which asset classes are over- or under-weighted compared with the proposed target allocation.
4. Develop Investment Policy Statement
An Investment Policy Statement (IPS) is prepared that describes your: goals, objectives and constraints, and risk tolerance; asset allocation strategy; performance measurement criteria; as well as any special considerations in the management of your portfolio. An IPS provides a description of how the portfolio should be managed and helps to keep investors committed as markets rise and fall. It also helps to ensure that your portfolio remains within your stated risk tolerance.
5. Portfolio Construction and Asset Location
Portfolio construction is the selection of specific investment vehicles to fill the proposed allocations. Investments available include individual securities (stocks, bonds), mutual funds, or exchange-traded funds (ETFs).
Kalorama constructs globally-diversified, multiple-asset-class portfolios using passively- and actively-managed mutual funds and exchange-traded funds (ETFs). We select investments through a rigorous quantitative and qualitative analysis designed to identify top-performing no-load mutual funds (some of which may be subject to a modest transaction fee) and exchange-traded funds (which are subject to a modest transaction fee). As a fee-only advisor, no transaction fees are retained by Kalorama in whole or part. If your situation warrants, individual stocks and bonds may be held in your portfolio.
Portfolio construction also includes asset location, which involves the strategic placement of your investments in taxable, tax-deferred, or tax-free accounts to achieve the highest level of tax efficiency.
6. Portfolio Monitoring and Rebalancing
Kalorama monitors clients' investments and portfolios on an ongoing basis to ensure that assets are invested in a manner that is consistent with the original investment strategy and risk tolerance. This includes a periodic review of the strategic asset allocation to rebalance the portfolio by restoring it to the original target allocation, or to determine whether the allocation should be adjusted and the portfolio rebalanced to agree with the new allocation. A new allocation may be required for significant life changes that would cause an investor to reconsider financial objectives and constraints. Kalorama also assesses the impact of taxes and transaction costs as a result of portfolio changes.
7. Performance Reporting
Kalorama communicates with you on a regular basis to review performance. Kalorama will send you quarterly and annual reports detailing portfolio holdings, transactions, and performance, as well as year-end tax reporting. You will also receive monthly account statements and trade confirmations directly from the custodian. Kalorama meets with each of its clients on a mutually determined schedule, but at least annually, to review the performance of their portfolios.
Many advisors require their clients to have a minimum level of investable assets before they will provide their services. Kalorama offers flexibility. If you have sufficient assets, we will manage your portfolio for a fee based upon a percentage of assets managed. For those who are just getting started, we will work with you on a consultative basis based upon the level of services desired.
The investment advisory process includes all of the steps outlined above. All investment advisory clients are provided ongoing portfolio monitoring and periodic rebalancing, as well as performance reporting. For those clients who are just getting started and wish to engage us for investment planning on a consultative basis, steps one through five of the above process are available on an hourly basis. Kalorama provides these clients a review and update of their investment plan on an "as needed" basis. This plan updating may include a review of individual investments, asset allocation, performance, as well as rebalancing recommendations.
Click here to subscribe to our complimentary e-newsletter.