Atlantic Capital Management

Atlantic Capital Management (116)

Thursday, 05 June 2014 00:00

Milestones for Rebalancing a Portfolio

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If you’re a regular reader, you know that we strongly encourage DIY investors to allocate the assets in their portfolios to reflect both breadth across markets and depth within markets. This is the strategy we use when investing on behalf of our own clients, and we have found that it offers a good balance of driving growth while minimizing volatility – one of the many risk management techniques we employ at Atlantic Capital Management.

Market dynamics being what they are, however, it’s important to regularly evaluate the structure of a portfolio and rebalance the asset allocation to take life and market changes into account. For example, emerging markets have been sliding over the past 6 months, warranting a hard look at what portion of your portfolio should be invested in that area, if any. Similarly, life changes, like pending retirement or buying a home, that impact the time horizon of your expected returns should also drive examination of your portfolio and/or adjusting your risk tolerance.

Following are a couple of milestones you can use for gauging whether it’s time to look at rebalancing the mix of assets or investment products that make up your portfolio:

Risk Tolerance and Time Horizon: If you find that your time horizon has been shortened by a life event or other unplanned-for situation, you will have to include some evaluation of your appetite for risk into the rebalancing equation. Investors with relatively stable, long-term goals can rebalance less often than investors who need more flexibility and liquidity. Undertaking a rebalancing should always begin with an honest assessment of your tolerance for risk.

Tax Status: Rebalancing a portfolio sometimes involves selling off portions of it, particularly equities. This, unfortunately, makes you subject to capital gains taxes in most cases. If your portfolio is heavily invested in taxable accounts, resist the urge to frequently rebalance unless you can stomach the tax consequences that come with it. The opposite is true if most of your investments are held in tax-sheltered accounts. It’s a good idea to consult a tax professional to understand the implications before moving a lot of money in and out of taxable accounts.

Transaction Costs: In general, most savvy investors aim for the lowest possible transaction costs, both in long-term and short-term scenarios. Paying a broker or advisor who takes a commission on the sale of assets makes frequent rebalancing less appealing, for many of the same reasons related to tax status. Even if you buy and sell on your own, pay attention to the overall transaction costs you incur when moving in and out of asset classes. Those fees can really add up and eat into your gains over the long-term. Try to avoid the double-whammy of taxes AND transaction costs by rebalancing only when it’s favorable.  Studies have shown that barring any major change in personal or financial circumstances, yearly rebalance is sufficient.

Thursday, 22 May 2014 00:00

Actively Managing Passive Investments

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Exchange-traded funds, or ETFs, are a popular and effective investment product utilized by many individual and institutional investors. Generally speaking, an ETF fund models the performance of a particular market or market sector index; when you invest in an ETF, your money grows or diminishes according to the performance of the index as a whole. ETFs run the gamut from mild to wild. For example, you can invest in ETFs which model a broad U.S. stock market such as the S&P 500 or the DJIA; you can also find ETFs which model foreign stock markets, like emerging market stocks.  There are also indices which mirror other markets such as commodities, real estate, bonds or currency.   ETFs provide a easy way to diversify at low cost with greater tax efficiency than you would find in the traditional mutual fund.   This is why ETFs a popular choice for many DIY investors.

Because you are investing in a basket of securities and not individual securities ETFs are considered a passively managed investment. This approach differs from the traditional actively managed fund in the sense that the securities in a mutual fund are actively managed throwing off taxable activity. Passively-managed funds are essentially binary: you are either “all in” or “all out.”

The portfolios we build for our clients often include ETFs for cost savings and diversification. Our experience has shown that ETFs are an excellent choice for portfolios built for “the long run,” and that they complement our actively-managed funds nicely. (Our investment strategy is generally “active.”)

If you’re considering making ETFs a part of your DIY investment strategy, we strongly recommend that you avoid tying up too much of your portfolio in passive investments. There are literally thousands of ETFs available, and the “point and click” ease with which you can buy into them makes it easy to overweight a portfolio with passivity. Incorporating some passive investments in a generally active portfolio is a solid strategy for most DIYers. Leave yourself some room to move pieces of your portfolio around if you need to, without the pressure of being “all in” on passive investments.

Having said that, we’re not advocates of “timing the market” or being impulsively active; we believe that the truest course to financial security is a long-term one. But we review our clients’ portfolios regularly and actively make adjustments based on their goals and tolerance for risk. Including ETFs in the portfolio mix gives us the flexibility to make adaptations with both the short term and the long haul in mind while still preserving the focus on diverse, low-cost investments. This is an approach to asset allocation that works well for us, and translates equally well for most individual or DIY portfolios. It’s a good long-term strategy; recent research from Morningstar indicates that on average, active funds outperform passive funds in market downturns, and passive funds outperform active funds when the markets are on the upswing. Funding a diverse portfolio never goes out of style.

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