At Winthrop Wealth Management, we apply a total net worth approach to both comprehensive financial planning and investment management. For the majority of our clients, we manage close to one hundred percent of their investable assets. However, investments held outside of our direct control and/or other assets, including, real estate, business ownership interests, restricted stock, insurance policies, and annuities are always taken into consideration. We create custom solutions for our client’s entire financial picture by implementing a proactive, conservative, and risk-based financial planning and investment management process.

Our total net worth approach serves as the basis for our investment philosophy and process. Our objective is to provide diversified portfolios designed to help our client’s meet their long-term goals and objectives. We do not invest exclusively in a single asset class or style that can move in and out of favor. We also stress the importance of understanding the difference between a single strategy and a total net worth approach. A single strategy can have over-concentrations across asset classes, factors, sectors, or individual positions. Our view is that a single strategy (i.e. value or growth equities) may be appropriate for a portion of a portfolio, but not for a client’s entire asset base. We seek to combine asset classes and exposures to achieve a defined level of risk; one that is both appropriate and palatable to the client in their journey to reach their goals.

The following data suggests that a diversified portfolio can lead to more consistent and less volatile results than a single asset class. The goal of any investment portfolio should be to consistently produce strong risk-adjusted performance – this is what separates talented portfolio managers from the rest of the pack. For individual investors the level of portfolio risk will vary depending on their individual circumstances.

To highlight the benefits of diversification, we examined the total return performance of nine separate asset classes and a diversified asset allocation portfolio from 2004 to 2018. This fifteen-year period includes the 2008 Global Financial Crisis. Note that from year-to-year many asset classes rotate from top to bottom performers. We will also highlight that the asset allocation portfolio consistently stays the middle. Why is that? Our hypothetical diversified asset allocation portfolio is comprised of 60% equities, 35% fixed income, 2% commodities, and 3% cash. Without getting too technical, the underlying asset classes are not perfectly correlated, in other words, they do not all move in the same direction. Furthermore, asset classes including equities and fixed income can sometimes have a negative correlation, meaning they move in opposite directions and act as a ballast. Over the full time period, the diversified asset allocation portfolio ranks as the 6th best performer, with the 7th lowest volatility, and the 3rd best Sharpe Ratio (risk-adjusted performance).

As part of our active investment process, we create diversified portfolios with a focus on risk-adjusted performance while accounting for upcoming cash flows. We believe this approach has several benefits:

• Potentially decreases the odds that our client’s will need to make a withdrawal after a significant market decline. A common and costly mistake is not planning for a scheduled cash flow need in advance, and then needing to fund it by selling assets AFTER a market drop. Although investment returns over the last several years have been strong, past performance is no guarantee of future results and we cannot predict the future. What we can do is pair comprehensive financial planning with investment management. Without a financial plan, the investor faces serious risk of having an improper asset allocation at an unfortunate time. We help our clients navigate through challenging markets by ensuring their short-term cash flow needs are covered, while managing the rest of their assets in globally diversified portfolios designed to meet longer-term goals.

• Avoids single strategy over-concentration. We will tilt portfolios toward the asset classes we believe will provide the best risk-adjusted performance going forward. However, we will not generally make large bets or completely abandon an asset class. As demonstrated in the above chart, selecting the best performing asset class in any given year is extraordinarily difficult to do, so we prefer not putting all our eggs in one basket. Additionally, rotating asset classes on a yearly basis could potentially create large capital gains for taxable accounts.

At Winthrop Wealth Management, we apply a total net worth approach to both comprehensive financial planning and investment management. Financial planning drives the investment strategy and provides a roadmap to each client’s unique goals and objectives. The comprehensive financial plan defines cash flow needs, optimizes account structures, considers tax minimization strategies, and continuously evaluates financial risks as circumstances and/or goals change. The investment management process is designed to provide well-diversified portfolios constructed with a methodology based on prudent risk management, asset allocation, and security selection. As always, please contact us if you have any updates to your personal or financial circumstances.