Client Portfolios will be are constructed using one or more of three (3) types of primary building blocks: (i) Income Defensive Building Blocks, (ii) Traditional Growth Building Blocks and (iii) Alternative Growth Building Blocks. The proportion and composition of each will vary substantially depending on market conditions and the primary objective and risk tolerance level identified for that account. When possible, ETFs will be used to minimize investment expenses. A portfolio might typically have 10- 15 positions; though rarely fewer than 10 or more than 20.
DEFENSIVE BUILDING BLOCKS:
Cash, ultra-low credit risk bonds (e.g. short and long-term U.S. Treasury bond ETFs, gold, bitcoin, inflation protected Treasury bonds, over-collateralized loans, and long/short funds et al).
Defensive building blocks are investments that are expected to store value and/or appreciate in periods of above average risk. When constructing your portfolio, we give thought to a myriad of different risks that we are trying to defend against in your portfolio: falling equity markets, dollar weakness, increasing credit risk, and inflation just to name several significant risks we consider.
Defensive building blocks serve an important role in portfolios. While we like cars for their ability to accelerate, would you ever want to drive a car that did not have functioning brakes?
Continuing the analogy, just as you do not apply car brakes the same way in icy conditions as you would on a clear and warm sunny day – the same is true with respect to the use of defensive building blocks when investing: defensive assets can react differently in different types of environments and therefore need to be used in concert with current market conditions and with prudence. There is risk any time you invest, even with defensive building blocks.
Another important asset class that serves as a key defensive building block is Cash.
In periods of high market stress, or when a number of otherwise useful asset classes are in a defined down trend, NWP may substantially increase your allocation to cash to preserve your assets. Although cash is a low yielding asset today, it adds value by being able to serve as a safe store of value over short periods of time and because it provides a source of “dry gun powder” during volatile markets, while waiting for attractive buy opportunities to arise.
Traditional GROWTH BUILDING BLOCKS:
EquityIndividual Stocks Securities, U.S. Index ETFs, Sector ETFs, International Equity Indices, and Real Assets, Commodities, Venture Capital, Private Equity, and Credit-Driven Securities et al).
Growth Building Blocks are securities and assets that are chosen for their potential to increase in value through capital appreciation driven by growth in their business. Growth Building Blocks are risky assets that commonly driven by GDP growth, industrial productivity growth, corporate innovation and profitability, individual and corporate income growth and retail spending to name some of the key return drivers. Growth Building Blocks can experience periods of high volatility and therefore we believe that they must be actively managed. We review positions in our strategies on a daily basis and look for positions that are not performing (to sell) and whenever possible try and let the winners run for longer periods of time.
ALTERNATIVE GROWTH BUILDING BLOCKS:
Alternatives may include funds that purchase assets at enormous discounts from deeply distressed sellers, viatical portfolios (longevity assets), tax lien investing (over-collateralized loans), litigation finance as well as volatility, forex and CTA trading strategies.
True “Alternatives” reduce portfolio risk by adding uncorrelated sources of return into the portfolio. The goal is to find investments whose returns are driven by factors that return drivers that are materially different than those found in Traditional Growth and Defensive Building Blocks. However, bona fide Alternatives are difficult to find. They are often illiquid with multi-year holding periods and tend to have high minimums and investor prerequisites. Beware: many Wall Street firms have been capitalizing on the desire for alternatives by repackaging traditional growth assets and labelling them as “Alternatives” when in fact their return (and risk) drivers are no different than most traditional growth assets. Due to their scarcity, our portfolios usually have less allocated to Alternatives than we would prefer.
We consider “Alternatives” to simply be a sub-set of “Growth Building Blocks” but distinguish them for the purpose of this document to provide you some additional insight into this widely marketed and misunderstood investment ‘category.’
DYNAMIC PORTFOLIO CONSTRUCTION
With our investment building blocks well defined above – how then do we construct portfolios?
When driving from Place A to Place B, the path is rarely a straight line. Driving usually involves turns, both gentle and sharp, acceleration, deceleration, starting and stopping.
Successful investing is much the same and likewise requires us to be forward looking. While we need to be mindful of history, with much to be learned from it, importantly, we need to look at the road ahead and proactively adjust accordingly.
The practice of changing your portfolio allocations based on what you see on the road directly ahead and based on changing conditions is called dynamic portfolio construction. We do not adhere to a fixed allocation to asset classes. Yes, there have been times in the last 100 years where that has worked, but there have also been quite a few times in that same time period when a fixed buy-and-hold strategy generated enormous losses.
Thus, as the condition of the economy and the markets change, we must adapt as well.
While National Wealth Partners, LLC has a discretionary mandate to manage Client accounts, we intentionally assign an Investment Strategy based on risk (lower, medium or higher).
The Investment Strategy is assigned either to the entire household or per account, to help ensure we are on the same page with respect to the degree of upside and downside risk being targeted for your portfolio(s) and that to make sure it is consistent with your goals and objectives as identified during our financial planning discussions.
Since Growth Building Blocks are generally higher in risk than Defensive Building Blocks, the risk level of the strategy is adjusted by increasing or decreasing the maximum permitted quantity amount of Growth Building Blocks in the portfolio compared to the amount of Income Defensive Building Blocks.
Our Lower Risk Growth Strategy can have a maximum of 20% of its assets invested in Growth Building Blocks. Our Aggressive Growth Strategy (and thus higher risk strategy) may have up to 80% of its assets invested in Growth Building Blocks.
Keep in mind, however, that subject to staying within the maximum growth building block percentages, we have and actively use our discretion to change the relative percentage of Defensive and Growth Building Blocks based on the markets. Said differently, these are not “fixed models” that are based on set percentages. We dynamically change allocations.
Learn more about asset allocation by contacting us today.