Investment Management
Actively Managed Investment Portfolios:
Maximizing returns and minimizing risks are the goals
of both active and passive investing. Both approaches can add value.*
Rather than buy-and-hold, active management focuses on flexibility. It allows managers to adapt to the current market ...Read More >
Maximizing returns and minimizing risks are the goals
of both active and passive investing. Both approaches can add value.*
Rather than buy-and-hold, active management focuses on flexibility. It allows managers to adapt to the current market environment.
The goal of active strategies is to have a positive impact on the risk/return trade-off by either lowering risk or increasing return. The active potential may come from various types of opportunities. Flexibility
allows for many asset classes to be included at times when the manager views them as more favorable. This could include traditional asset classes like corporate bonds, small company stocks or value stocks. Other opportunities may exist in alternatives like real estate, high-yield bonds, commodities, and others. Opportunities may also include international investments.
This additional diversification has the potential to provide a portfolio with better outcomes over the long term.* One prominent tool for recognizing opportunities is positive momentum.
Momentum investors believe that during specific durations of time winners stay winners and losers stay losers. Momentum has been tested extensively by academic researchers and published in financial journals (Jegadeesh, Narasimhan, Titman, 1993, Returns to buying winners and selling losers: Implications for Market Efficiencies, Journal of Finance 48, 65-91).*
Quantitative analysis provides another source of research. Rather than apply subjective decisions, quantitative models apply mathematical formulas to the current market.*
Technical analysis focuses on what is actually happening. While it may not be the primary driver for what is happening, looking at technical charts and numbers can provide a helpful overview of the market.*
SFS Proactive Portfolios utilize a combination of all these active strategies.
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Segmenting "The Market:
While many investors may refer to "the market," there are actually many markets and many ways to segment those markets. One way to separate investments is to look at company size. Other common divisions are made by estimating potential growth (growth stocks), or by comparing current prices with an accounting value (value stocks). Momentum stocks are those that have outperformed the average during a certain time period. This segmentation, along with other areas of the market, may provide opportunity to those who understand them.
Understanding long-term and short-term trends:
There are specific areas of the market which have outperformed the general market over the long run (40+ years). For example: small-company stocks have outperformed large-company stocks; value stocks have outperformed growth stocks; and high momentum stocks have outperformed low momentum stocks ...Read More >
There are specific areas of the market which have outperformed the general market over the long run (40+ years). For example: small-company stocks have outperformed large-company stocks; value stocks have outperformed growth stocks; and high momentum stocks have outperformed low momentum stocks (Fama, 1991, Efficient Capital
Markets, Journal of Finance, 46, 1575-1617). These factors are an integral part of SFS portfolio management.*
However, the relative dominance of small, value, and high momentum stocks is not consistent. There are periods of time in history when these strategies fall out of favor and just the opposite has been true. The relative trend when large cap out performs small cap can persist for many years, allowing SFS time to recognize the trend.*
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Tax-Efficiency for taxable accounts:
Tax consequences can be a serious wealth-management hurdle. Arthur Godfrey once said, "As an American I am proud to pay my taxes. But I'd be just as proud for half as much."
The goal of a tax-efficient portfolio is not to minimize taxes, but to ...Read More >
Tax consequences can be a serious wealth-management hurdle. Arthur Godfrey once said, "As an American I am proud to pay my taxes. But I'd be just as proud for half as much."
The goal of a tax-efficient portfolio is not to minimize taxes, but to maximize after-tax returns. While it is unlikely to achieve a 50% reduction in taxes, a tax-efficient portfolio may help reduce the taxable events in non-qualified accounts.
Taxes often stem from capital gains and dividends. With the right strategies the tax consequences of these events can be reduced.
Taxes on dividends come in various forms. Ordinary dividends are taxed at ordinary income tax levels. This is typically the least tax efficient. Introduced in 2003, qualified dividend income allows for some dividends to be taxed at a maximum rate of 15%. Securities must be held for a designated amount of time to qualify.
Dividends received from investments in municipal bonds typically provide exemption from federal taxes.
Short-term capital gains are taxed at your ordinary income-tax rate. Long-term capital gains are taxed at capital gains rates. Most capital gains are incurred after selling a position for a profit. However, funds can pay out capital gains distributions based on their own internal trading regardless of whether you have sold.
Passive investment strategies help minimize short-term capital gains by keeping turnover low. Capital gains distributions can be managed by investing in more tax efficient investments.*
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Investment Risks
Behavioral Risk:
The most difficult risk to control is behavioral risk because it has roots within the heart and mind of every investor. Emotion can lead an investor to act illogically and to interpret risk incorrectly.
The positive emotion that comes from making money may lead investors to feel that ...Read More >
The most difficult risk to control is behavioral risk because it has roots within the heart and mind of every investor. Emotion can lead an investor to act illogically and to interpret risk incorrectly.
The positive emotion that comes from making money may lead investors to feel that there is lower risk than what actually exists. When market prices drop significantly, investors may feel that the risk is greater. However, by applying 20/20 hindsight, an investor may see things differently. The greater risk may have been near the top, while lower risk could be found when the market was near the bottom. The best solution in this scenario is to have a solid plan, education, and strategy.
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When Is Risk the Greatest For Investors?
Overconfidence can lead to multiple mistakes. At the root of this emotional error is a hindsight bias that
makes historical events seem more predictable than they actually were before they ...Read More >
Overconfidence can lead to multiple mistakes. At the root of this emotional error is a hindsight bias that
makes historical events seem more predictable than they actually were before they occurred. The end result may be dismissal of the risk/return trade-off, a lack of diversification, and too much activity within a portfolio.
On the other hand, risk aversion can also lead to mistakes. In an effort to avoid losses, an investor may not take enough risk to keep up with inflation to reach specified goals. Even after implementing a well-designed plan, a risk-averse investor may hold on too long to losing positions, sell at the first sign of losses, or get out and stay out of the market.
The greatest risk of all is that an investor may not reach his or her goals. This is precisely why a
strategy must be implemented to maximize opportunity and manage risk, even behavioral risk.
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Market Risk:
Overconfidence can lead to multiple mistakes. At the root of this emotional error is a hindsight bias that
makes historical events seem more predictable than they actually were before they ...Read More >
A downturn in the market not only interrupts the positive compounding of returns, it also leads to losses. In these bearish times it is common for investors to seek refuge in conservative investments. This decision may not be as safe as some investors think. Decisions like this can lower the probabilities of reaching long-term goals.
There are two principal concerns with the decision to move to "safety."
First, most of these "safe" investments are likely to have lower long-term returns. They may not even keep up with inflation. That means the money could actually be losing value. Second, modifying your investment plan out of fear gives little hope for recovery. This decision to move in and out of the market for safety may seem important, but may diminish long-term performance, jeopardizing your goals. The above chart demonstrates how long it will take to break even if such a change occurs.
There are good reasons for modifying an investment objective. Most of these are rooted in a wealth management plan.
A well-designed wealth management plan will help you assess your risk and diversify your assets based on your goals and your need to access them over time.
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Purchasing Power Risk:
Individuals who place too much of their money in safe, predictable locations may run out of money sooner than they thought possible. This is due to inflation, which results in the gradual erosion in the value of their money. Low-yielding investments may not even keep up with inflation. This is a serious problem. No matter what your goals, they should include beating inflation.
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*Securities America and its representatives do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.