One of the most important decisions that an investor makes is the allocation of assets into stocks, bonds, cash reserves and other asset categories such as real estate. Thus, at Bradley, Foster & Sargent, we spend a great deal of time in the early phase of our relationship with a client discussing financial goals and objectives and seeking to structure each client’s portfolio in such a way as to achieve their financial goals.
Before choosing an asset allocation model or approach, an investor needs to think through and determine the primary objective of the portfolio: capital appreciation, capital preservation, or distribution of income.
Additionally we work with our clients to ensure the following key elements of portfolio construction are considered:
- Time horizon of the portfolio
- Degree of risk or volatility that can be tolerated in seeking to maximize investment returns
- Distribution of income that is required
- Tax status of the portfolio
After a thorough discussion with the client, we then determine the asset allocation approach for each portfolio. A family may have a different asset allocation for each portfolio, as each portfolio may have a different goal. The asset allocation of a taxable portfolio established for the education of children in 5-10 years will likely be very different from an IRA with a time horizon of 30 years.
Capital Appreciation: Approximately half of the client assets which we manage have capital appreciation as the primary investment objective. Portfolios with this primary objective generally have an equity weighting, depending on market conditions, of 60-95% equities with the balance in fixed income instruments and cash reserves. In addition to investing in large capitalization U.S. equities, growth-oriented portfolios may hold small and mid-cap equities, international stocks and emerging market securities.
Capital Preservation: A considerable portion of the client assets we manage have capital preservation as the primary objective. Along with this primary goal, most clients have secondary goals of distribution of income and capital appreciation to outpace inflation. Portfolios with this primary objective generally have an equity weighting, depending on market conditions, of 20-60% equities with the balance in fixed income instruments and cash reserves.
Distribution of Income: Many of our individual and institutional clients depend, to a considerable degree, on the distribution of income and principal from their portfolio. This primary goal is tied closely to preservation as well as appreciation of capital, as the growth of income over time can only be accomplished with a portfolio which appreciates over the longer term. The asset allocation of client portfolios which distribute cash on a regular basis can vary widely, depending upon the key features of portfolio construction as described above.
Percentages are based on Assets Under Mgmt. as of December 31, 2016