George Fisher Advisors LLC

Portfolio Management

The Investment Planning section examines the concept of value investing and stresses the three main components of my investment philosophy:

A prudent investor will retain a considerable level of control even when funds management is outsourced

Always focus on producing reliable cash flow

Strategic asset allocation is key to long-term returns as well as volatility control

Tactical asset allocation will ensure the portfolio maintains its strategic character

Broad diversification is critically important to long term success

This section introduces the vital but often misunderstood topic of portfolio rebalancing. To start, take a look at the two charts below.

Let’s assume the chart at top left represents an investor’s portfolio at the beginning of a given period. The asset classes are quite normal and the weightings realistic. Let’s also assume that the chart at bottom left represents the same portfolio exactly twelve months later.

Clearly, the asset allocations have altered during the year in review: equities have grown from 40% to 55%, while the cash and bonds have diminished. This doesn’t necessarily imply that the portfolio has increased in value; it’s quite reasonable to assume that it may have decreased. But the essential point is that the asset classes no longer have the same weightings they had at the start of the year. Put another way, the portfolio is riskier now than it was twelve months ago.

At this point, according to conventional wisdom, it is time to rebalance the portfolio. One way would be to liquidate some of the equities and re-invest the funds in cash and bonds. Another way would be to increase the cash and bonds holdings by injecting fresh capital into the portfolio.

But is this really the correct thing to do? Very often, the answer is no. Several factors support this assertion, but one of the most compelling is that the long term costs of frequent or continual rebalancing can actually outweigh the benefits.

The Costs of Portfolio Management

An investor must closely monitor the cost/benefit of the investments. Costs can eat up an average of 50% of an investor’s returns ... the returns must always exceed the costs and this is a tradeoff that requires continuous monitoring..

More than anything else, my job is protect your assets. I help in other ways, too. But managing costs is a fundamental part of an effective, long term investment strategy.