Because every investor is unique, we take an individualized approach to each client. At the same time, we’ve learned that investors tend to arrange themselves in clumps along a risk spectrum ranging from ultra-cautious to super-aggressive. We have designed five model portfolios that correspond to these risk levels. (See How We Invest to learn how we do this). These model portfolios are the starting point for our financial advisors to create customized portfolios for every client.
Each of our models utilizes Asset Allocation to assure that we provide a broad range of diversification, an approach that lowers risk within each level. Asset Allocation is the practice of dividing investments among a variety of securities categories including various types of bonds and stocks. In general, higher risk portfolios will be weighted toward more investment in the volatile stock market, while lower risk portfolios are oriented more toward savings and bonds that do not fluctuate in value much if at all. Still, all portfolios include a healthy mix of assets to assure proper diversification.
This can sound a bit dry, so when we wrote Investing with Your Values we came up with a playful way to visualize the choices: The Beach Lover’s Guide to Asset Allocation.
Picture yourself at a beautiful sandy beach on a warm, sunny day. The surf is up. The gentle beach represents conservative bond investments. The lively surf represents volatile stock investments.
You sunbathers put on a bathing suit primarily to get a tan on the beach, maybe venturing to the water’s edge (but no farther) to wet your toes.
You are conservative, very-low-risk types. Your goal: preserve capital. You don’t want the value of your investments to fall much, if at all, for any length of time. You’re willing to take just the smallest risks to achieve steady income with a slightly higher return than that offered by bank CDs.
The slightly conservative, low-risk investor is the wader.
You will wade out to where the water is just about knee deep and it’s easy to run back to the shore. Your goal: primarily income. You want to have a steady return of interest to augment your other income. You can put up with small, short-term losses in return for a degree of longer-term growth.
Braver souls are dunkers.
You go out into the surf about waist high and occasionally lower yourself into the water to cool off your whole body. You would be classified as a growth-and-income-oriented, medium-risk investor. Your goal is a balance between income and growth. You’re willing to accept some stock losses over the next three to four years. A bond component stabilizes your portfolio.
The confident swimmer who feels comfortable in deep water is known as the growth-oriented, high-risk investor.
Your goal: capital growth. You want your portfolio to increase in value, and you hope it will grow significantly. You’re willing to sustain capital losses over the next five years; you can live with market volatility because you seek long-term gains.
Last is the surfer way out in the sea, waiting to ride the big wave.
You are an aggressive-growth, very-high-risk investor. Your goal: capital appreciation. You’re looking for the highest possible growth and are willing to accept losses over the next ten years if there’s a major market correction. Surfers accept-and even thrive on-market volatility.
Your advisor will work with you to find where you fit on the shoreline of finance.
You may feel like you are in between categories, in which case we will modify our model to fit your needs. As you get more experience with investing, you may get braver; your advisor may then recommend shifting some holdings into a riskier category. Likewise, if a burst of early enthusiasm carries you too far out to sea, your advisor can make your portfolio more conservative.