STEP 1: discovery
You and your advisors discuss in detail:
- In cash because of an inheritance or sale of a business?
- Tied up in a business?
- What is the structure of your liabilities?
- Do you have a wealth transfer plan?
- What is your family’s governance and decision-making process?
- Near, intermediate and long term?
- Wealth transfer?
Your risk tolerance: If investors fail to gauge their true appetite for risk, they can be too aggressive and lose money, or too conservative and miss opportunities. Avoid regrets by focusing on and prioritizing specific needs and goals. How would a loss of, say, 25% impact your ability to meet your goals?
STEP 2: Strategy
Answers to these and other questions can help determine your cash flow and liquidity needs, debt-servicing costs and wealth transfer and other life goals, as well as create a strategic asset allocation plan (SAAP) to help meet those requirements.
- The SAAP is based on U.S. Trust’s economic, market and asset class risk and return forecasts, rather than on historical data.
- We stress-test the recommended portfolio, using simulations based on: 1) Expected near-term market conditions and 2) The likely tax environment. The goal: Create a margin of safety to help ensure you can meet spending needs and wealth transfer goals.
- To avoid duplication and correlation risks, we consider the recommended portfolio in the context of your other investments.
Once this work is complete, your advisors provide a detailed SAAP recommendation in the form of an Investment Policy Statement (IPS) for you to consider.
STEP 3: implementation
While the IPS is a long-term guide, implementing it requires a shorter-term tactical framework to guide the practical aspects of rebalancing and deploying capital to specific asset classes.
- Targets less than a full market cycle; scope changes as circumstances demand — perhaps 12 to 18 months in a high-volatility environment, as long as 36 months when conditions are calmer.
- Asset classes are ranked using a variety of macroeconomic, industry and financial market analyses to determine tactical weightings.
Your advisors then use a short-term risk-budgeting and volatility framework to determine when and how much to move into each asset class — or when to leave it.
STEP 4: monitoring and rebalancing
Once a plan has been implemented, we monitor the portfolio and rebalance as needed. Monitoring is an active process that involves:
- Short- and long-term analyses of asset allocation, performance and performance versus benchmarks.
- Top-down examination of managers.
- Bottom-up analysis of individual securities.
- Modeling shock scenarios.
- Reviewing portfolios on both the asset and liability side.
- Examining the portfolio in the context of all other investments, including those with other providers, to spot deviations and hidden correlations and risks, and then take corrective action.
Monitoring also involves ongoing communication between you and your advisor — in other words, a regular return to step 1, the discovery process — to ensure that the investment approach continues to reflect your evolving goals and needs.
Asset allocation, diversification and rebalancing do not assure a profit or protect against loss in declining markets.
Investing involves risk. There is always the potential of losing money when you invest in securities.
Always consult with your independent attorney, tax advisor, investment manager, and insurance agent for final recommendations and before changing or implementing any financial, tax, or estate planning strategy.