EQUITY INVESTING


A number of disciplines are used in the design of a client’s equity portfolio.  These include diversifying among industries to reduce sector specific risk, balancing growth prospects with valuation measurements, and taking into consideration risk tolerance levels and time horizons.

This investment approach is designed to afford clients the opportunity to participate in a variety of market segments over a market cycle, because over time various segments are rewarded.

Diversifying among Industries

The analysis begins by using the S&P 500 as a proxy for the market.  It is then divided into 10 sectors: Basic Materials, Consumer Cyclical, Consumer Staples, Energy, Financial Services, Healthcare, Industrial, Technology, Telecommunications and Utilities.  Clients are then invested in at least 6 of these sectors, which should account for 75% of the market’s capitalization.  A weighting is assigned to each of these sectors to reflect their appreciation potential.

Balancing Between Growth and Valuation

To manage growth and valuation, a mix of stocks are created that have high growth characteristics with stocks that have more attractive valuations. Growth stocks are normally associated with businesses that have fast growing earnings and above average price earnings ratios.  In contrast, value stocks are stocks that are trading at a discount relative to their perceived underlying value.

Risk Tolerance and Time Horizon

To align a portfolio with an investor’s level of risk tolerance and time horizon, two primary pieces of data are viewed: the beta and the yield.  The beta is a measure of risk that compares the investments volatility to the overall market’s volatility.  The higher the beta, the higher the risk as compared to the market.  The yield on the stock is the stocks dividend payout divided by the stock price.

All of these measurements are reviewed in relationship to the overall portfolio, which is then compared to market benchmarks like the S&P 500 Index.