Director of Portfolio Strategy – Adam Phillips, CFA®, CFP®
Often quoted in major national media, Adam is a Chartered Financial Analyst (CFA®), a CERTIFIED FINANCIAL PLANNER™ (CFP®), and has been included on the Forbes Next Gen Best-in-State Wealth Advisors 2019 list. He is a member of the CFA Society of Los Angeles and the CFA Institute. Adam helps establish asset allocation strategy as a member of the EP Wealth Investment Committee, which supports all EP Wealth Advisors and their clients. The Committee’s top-down approach to portfolio construction begins with an outlook on the economy’s likely direction, followed by the implications for different economic sectors and asset classes. This culminates in strategic selection of the individual stocks, bonds, mutual funds or other investments deemed most appropriate for each individual client’s portfolio.
Special Guest: Director of Financial Planning – Erin Voisin, CFP®, ChFC®, CDFA®
Also a go-to resource for national media, Erin is a CERTIFIED FINANCIAL PLANNER™ (CFP®), a Chartered Financial Consultant® (ChFC®) and a Certified Divorce Financial Analyst (CDFA®). An Enrolled Agent with a Master’s degree in Accounting, she is a CFP® Board Ambassador and leads the EP Wealth Advisors Financial Planning Department, a department that is integral to the services the firm’s entire team of Advisors provides to all clients.
One way to define asset allocation is as a means to an end. That end varies with the specific goals of each individual—including retirement, college savings, or leaving a legacy to heirs or charity. In order to invest your assets in a way that provides growth potential to meet the goals you’ve established, the next step in building a financial plan is to collect information on everything in your life that has a dollar sign. This includes:
● tax returns
● pay stubs
● employee benefits
● investment account statements
● property casualty statements
● estate-planning documents
At EP Wealth Advisors, we plug these details into online software that provides each client with a Personal Financial Website. Then we can take the asset valuations and cost-basis information and extrapolate the possible outcomes over the next 30, 40 or 50 years and beyond—both for a client’s current portfolio, and to test the possible consequences of revisions to their asset allocation.
There are various ways to project the future returns for a given asset allocation. While looking at historical average risk and return data for components (such as the S&P 500) is one of the easiest ways, it provides no guarantees and doesn’t offer insight into the range of possible outcomes. We use a more sophisticated technique called a Monte Carlo simulation, which provides greater visibility into the risk of a given portfolio by running it through a thousand different trials that capture the range of possible outcomes and their likelihood. For example, a portfolio that might average a five or six percent annual return could deliver two percent in one year and eight percent in another. Given that variability, we also need to consider the portfolio’s ability meet goals while allowing for the impact of inflation on various aspects of the client’s budget—especially healthcare, which notoriously outpaces general inflation.
In order to create a portfolio whose return combines an adequate safety net for budgeted expenses with ongoing growth potential, we then allocate assets based on the range of returns and risk that simulations project for specific combinations of asset classes. This goes deeper than the broad classes of stocks as an aggressive component and bonds as a conservative component. We’ll also be looking at asset subclasses such as:
● large-cap stocks
● small-cap stocks
● international developed markets
● emerging markets
● high-grade bonds
● low-grade, or junk bonds
It’s important to note that our job isn’t done when we determine what the initial asset allocation is for a client. Our portfolios are dynamic. The economy is constantly changing, and different opportunities arise. We discuss these opportunities on a weekly basis at the Investment Committee level, and change portfolio allocations when appropriate based on the current environment.
Asset location, a companion strategy to asset allocation, is a strategy that probably isn’t talked about enough. Asset location refers to which assets you hold in which types of accounts. This is driven by tax consequences. For example, stocks generate dividends and capital gains when sold, both of which currently are taxed at rates that for many taxpayers are lower than the rates on their ordinary income. So ideally, these assets would be held in taxable accounts. Some mutual funds, on the other hand, may have a lot of annual turnover and routinely generate high capital gains. In this case holding them in a qualified, tax-deferred account—say an IRA or 401(k)—can spare the client potentially huge tax bills. There may also be situations, such as an IRA that is unlikely to be depleted within the lifetime of the owner, where combining the tax-deferred location with a more aggressive allocation to stocks may better deliver the risk/return balance appropriate for the longer-term goals of heirs.
Markets rise and markets fall. Volatility can extend to other aspects of your life as well, such as your employment. When creating an optimally allocated portfolio for a client, a key goal is to offer a smooth ride that reduces volatility enough so they can maintain their course. This can mean reducing exposure to high-risk stocks that may appear to offer exceptional straight-line growth, but in reality look terrible when a Monte Carlo analysis reveals how widely their results may diverge from that expectation. Another risk could be that a given client has too much stock in the company they work for. There should be some diversification between your human capital—where you’re getting your paycheck from—and your financial capital.
Above all, the projected return from a chosen asset allocation must be compatible with whatever share of your budget it is expected to fund. Some people say, “Oh, if the market goes down, I’ll just spend less.” That’s easier said than done. We make sure we build in a budget that’s sustainable for the long term, with the flexibility you want, but also able to withstand the risk projected for the asset allocation we’ve chosen to support it.
With a staff of professionals and access to sophisticated analytical tools, EP Wealth offers a comprehensive range of services to help you invest with greater insight, as well as develop a holistic wealth management strategy. To discuss your finances and investment goals, we invite you to contact one of our advisors.
This is #1 in the Informed Investor “How to Build Your Investment Portfolio” series. Other topics include Why We Diversify, How to Buy a Stock, How to Buy a Bond, Concentrated Positions, etc. For more information on our investment process, check out our investment management page or ask for a Portfolio Review.
The EP Wealth Advisors financial planning process starts with the relationship between you and your financial advisor. How do you value a financial coach? Developing a partnership that ensures we understand your goals lets us help you prioritize and organize your financial decisions—so you can achieve peace of mind and live your life.
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