Financial Counselors of Virginia

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Policy Portfolio

Example - Pattern - Archetype - Standard - Prototype - Model

These are other words that can be used to describe what we refer to as a Policy Portfolio. Our Policy Portfolio is the starting point we use to guide us when we design clients' portfolios. Such a portfolio rests squarely on one premise, "Life is uncertain." We cannot know the future, but we have to prepare to live in it. And, while we cannot predict the future we do know about the past and can learn from it. Consequently, our Policy Portfolio is based firmly on what we know has already happened and what that implies for the future. It has proved to have a very good balance between risk and return. We also realize that because the financial markets have behaved in certain ways for the past 150+ years does not mean they will behave similarly in the future. There are so many more types of investments today that did not exist even a few years ago that the entire investment palette has changed dramatically. We cannot continue to paint the same investment picture as in the past.

One concept we stress is the difference between investments and investing. No one can control or modify the risk/return characteristics of a single investment, but when you combine different investments into a well designed portfolio, you can, indeed, affect the risk/return characteristics of the portfolio. That is investing.

Listen to a discussion about portfolios.

Also, please see our page on Portfolio Management for more information.

Core
Cash
Fixed
Equity
Diversification and Excess Return
Real Assets
Diversifying Strategies
Hedging Techniques
Excess Return Assets

30% - 70%
2% - 25%
10% - 50%
10% - 50%

70% - 30%
0% - 25%
0% - 25%
0% - 25%
0% - 25%

Our initial model includes both "core" and "other" assets.

The core assets are those assets that offer market exposure; that is, you gain exposure to various markets with no real attempt to "beat " the market. Instead, you accept market returns and take only market risk. The most efficient way to gain this market exposure is through the use of low-cost closed-end exchange traded funds. The allocation to core assets will be within the range of 30% to 70% of the total portfolio with a typical allocation of 60%.

Within that core allocation, a portion is allocated to fixed assets and a portion to equity assets. The fixed assets include cash or cash equivalents, domestic and foreign income instruments. The allocation to fixed assets will be within the range of 10% to 40% of the total portfolio with a typical allocation being 24%. Within that allocation to fixed assets, cash will be within the range of 2% to 25% of the total portfolio with 6% as the typical. The range of domestic and foreign fixed income securities will be within the range of 5% to 20% each of the total portfolio with the typical allocation being 9% of each.

Domestic equity core exposure will be within the range of 20% to 50% of the total portfolio with the typical allocation being 36%. Within that core equity portion, allocation to both domestic and foreign equity will be within the range of 20% to 50% with a typical allocation being 18% to each.

The "other" or "satellite" or "everything else" portion of the portfolio will contain those investments that are less correlated to the world's financial markets as represented by cash, stocks and bonds. This "everything else" (ETE) portion will contain varying amounts of:

real assets including real estate, natural resources and metals;
diversifying strategies where we rely upon specific managers in their attempts to either increase return or lower risk by employing specific, often proprietary strategies;
hedging techniques where we strive to protect the portfolio either from losing principal or maintaining purchasing power;
excess return assets where we look to greatly out perform the standard market indexes.

This ETE portion will be within the range of 30% to 70% of the total portfolio with a typical allocation being 40%.

Please remember, this is a model, not a requirement. Virtually every client's portfolio will vary in some way from the standard.

What has been the effect of diversifying a portfolio across a broad grouping of asset classes in recent years? Consider the following depiction of some major and widely used asset class benchmarks over the past decade of 1996 - 2005. The effects of diversification are perhaps better seen in this graphic representation of the same data, in which the vagaries of asset class returns are clearly displayed.

Now, we will re-constitute the same asset class benchmarks to conform to the particular allocation used in the above Policy Portfolio and examine the result. You can see that properly diversifying your portfolio can retain most of the return of a totally stock portfolio while reducing the standard deviation (price volatility) to about 1/2 of the stock market. That is a goal worthy of seeking.

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Financial Counselors of VA is an independent Registered Investment Advisor based in Portsmouth, VA, providing
fee-only financial planning services and investment management advice to individuals and families since 1985.

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