1.  Risk Tolerance Adjustment

We believe that risk must always be managed to practically eliminate the possibility of a shortfall -- not just for a distant future, but also at every point along the way.  Within that constraint, we seek the best typical long-term result.  This approach not only specifies different portfolios for different investors, but it modifies the effective risk tolerance for each investor as both markets and the relation of their wealth to their shortfall levels evolve.

In this case, a picture is worth a thousand words.  Here is a hypothetical transition of an aggressive portfolio to a very conservative portfolio as continued stock market declines dictate gradual increases in the bond portion of the portfolio.  On the other hand, as the stock market rebounds, the increased discretion above a client-specified shortfall point would encourage gradually increasing cash flow from bonds back toward stocks.  If you are a prospective client, contact us and we will be happy to share actual results.

2.  Diversifying Away From A Large Holding

Many substantial private investors find themselves with an uncomfortably large holding, perhaps 30% or more of their entire portfolio.  They are inhibited from selling it for valid tax reasons.  Or, they may own a business, public or not, that constitutes an even larger portion of their financial resources.  Or as highly compensated executives, they may hold long-term options in their employer's stock that far outweigh their other financial inputs.

Things are no better for many businesses that have encouraged company stock ownership in their employees' 401-K pension plans.  What is supposed to motivate and reward employees can turn into a very disappointing experience if the company falls on tougher times.

In all these cases, it is important that the part of the investment portfolio not concentrated in a single stock or business provide superior long-term, low-cost diversification.  We will gladly construct and maintain such a complementary sub-portfolio, with the goal of improving on generally broad market index funds for that purpose.

For example, in comparison with a broad index fund, a Microsoft employee with a large position in long-term Microsoft options would probably find it more useful to emphasize in the remainder of their stock portfolio a heavier weighting of value stocks, with more in the financial, energy and utility sectors, as well as smaller niche stocks.  The best portfolio for diversification would also have less in the technology and large consumer stock sectors, and would have fewer growth stocks than found in the S&P 500.

2.  Diversifying Away From A Bond-Heavy Portfolio