Asset Allocation and Diversification with Non-Correlated Asset Classes

When Harry Markowitz hypothesized the Modern Portfolio Theory he did so with the belief that asset allocation and diversification were two of the central tenants that explain how a portfolio of traditional asset classes will perform. At Different Investments™, we decided to build on this concept by including different alternative investment strategies with traditional asset classes to help manage portfolio volatility. These alternative strategies can include, but are not limited to, managed futures funds, master limited partnerships funds, real estate investment funds, long short funds, global macro funds, commodity funds, hedged strategy funds, and market neutral income funds. Each of the alternative strategies we use meet the strict requirements laid out under the Investment Company Act of 1940 and are marketed to the public as a liquid alternative investment strategy.

Active Research Leads To Active Return

At the onset of every client engagement, we explain that our investment methodology is rooted in constructing a well-diversified portfolio that seeks to optimize return on a risk-adjusted basis, based on our client’s future goals. Therefore, to build an appropriate investment strategy, we complete a thorough analysis of a client’s current financial situation. This research allows us to calculate the required risk and return level needed to pursue the goals laid out in a client’s financial plan – a plan created by the client or by the client’s financial planner.

Then we select one of our model investment strategies that we feel will align with a client’s financial plan. Depending on each client’s pre-existing investments and type of investment account, we may choose to quickly rebalance into our new portfolio or tactically migrate their pre-existing portfolio into our target portfolio over a twelve month duration. In some cases, we may elect to migrate over twenty-four months if there is a large portion of unrealized taxable capital gains.

Personal Rate of Return

When evaluating the performance of a client’s portfolio, we make it a point to collaborate with the client, or their financial planner, to review a client’s financial plan and corresponding required rate of return. It is our belief that chasing the returns of “the stock market” is futile. For an investor to believe they should gauge their portfolio performance on how an index performs would be similar to gauging one’s progress in the gym to everyone else’s perceived progress. Since each person is different, it stands to reason that their goals, motivations, resources, and biology are also different. This same thought process applies to building an appropriate target return. A target return should be tied to an investor’s personal goals instead of to the performance of a broader group.

Our experts will construct a client’s personal rate of return by evaluating a client’s resources and future goals, understanding how much portfolio volatility their plan can accept, and most importantly, how much time is needed to attain their desired goal. Taking this approach helps our clients understand what their required rate of return needs to be, and how much portfolio risk they need to accept. If their required return is higher than historical averages which in turn requires them to accept more risk than they are comfortable with, then this allows our team to set appropriate expectations with the client as they pursue their goals. Approaching investment management this way ensures both the client and our team understand what the client, or their financial planner, needs to do in order to execute a client’s financial plan AND how Different Investments™ can gauge success across a client’s aggregate portfolio.