The  primary component of success in investing is asset allocation. We use a financial model to determine an appropriate mix of stocks, bonds, cash and other investments for each client portfolio. When managing investments for a client, each portfolio is assigned a target for stocks, bonds and cash. Performance is then measured against the similar mix of the Standard & Poor's 500 Stock Index, Lehman Brothers Intermediate Government Bond Index and 90 day U.S. Treasury Bills.

We use exchange traded funds (ETFs) and a few open end mutual funds to invest in stocks. This is a cost effective way to obtain diversification. The ETFs track indices. The mutual funds are actively managed. At present our default stock allocation is:

 

20% domestic stocks – we are not optimistic about corporate governance of large U.S. companies, the U.S. economy and the outlook for the U.S. dollar.   Nevertheless, the U.S. has the largest economy of any single country in the world and much of the revenue of U.S. stocks is derived from offshore sales so we want some stock exposure.

 

40% international developed countries – Developed nations are those with per capita gross domestic product greater than $20,000.  We use ETFs to invest in indices of the largest stock exchanges in developed nations that we think have good prospects for growth. We look at current price-to-earnings ratios, the underlying currencies and various characteristics of the countries to determine what is attractive at any given time. Developed countries with excellent characteristics that we like include: Norway, Germany, Singapore, Canada, South Korea, Switzerland, Sweden, Belgium, Netherlands, Australia and Taiwan.

 

40% international emerging countries – We use ETFs to invest in companies traded on exchanges in emerging markets. We also use open end mutual funds to invest some of the funds we allocate to India and China because we believe the cost of active management is justified. Emerging market countries with excellent long term prospects include: China, India, Brazil, Turkey, Poland, Indonesia, Malaysia, Mexico, South Africa, Chile and Thailand.

 

We prefer not to take market or credit risk in fixed income and cash.   For fixed income, we purchase individual U.S. government, agency and municipal bonds rated AA or better. We also buy FDIC-insured certificates of deposit. In the current interest rate environment we keep maturities relatively short and have not bought bonds with maturities longer than three years for some time. For cash we use institutional money market funds and U.S. Treasury bills.

In light of the low interest rates of the last few years and low prospects for any increase we currently invest some of our fixed income allocation in ETFs that purchase government bonds of emerging market countries. This involves some market, currency, credit and interest rate risk. Such investments are made with the knowledge and understanding of clients. We also use some of our long fixed income allocation to buy individual domestic stocks with high dividend yields from companies with strong cash flow and a history of dividend payments.

We prefer clients to invest in real estate directly and do not buy REITs. We consider hedge funds and other alternative investments including commodities for qualified investors.

We dislike gold as an investment. We recognize its usefulness as a hedge against the breakdown of currencies or social order.   We prefer that clients cover this aspect in their unmanaged portfolios. For clients desiring a fixed percentage of their portfolios to be exposed to gold we use a bullion ETF such as GLD or ETFs that invest in gold mining stocks depending on the tax status of the portfolio.