Anne Ogan answers some FAQ's.
What separates us from other investment management firms?
We believe individual investors rarely find a manager who has adopted, adapted and applied the sophisticated and time-tested practices of multibillion-dollar accounts, where years of research go into the development of prudent strategies. We control risk rigorously, using multi-manager approach and a broad spectrum of asset classes.
What is diversification?
Diversification refers to the practice of buying many different securities that have different behavior and characteristics from one another in order to reduce risk.
Why will diversification help me?
Diversification allows an investor to participate in multiple types of securities that respond differently to factors that cannot be controlled, like interest rates or the business cycle. Investors, who diversify into assets that do not move in concert with each other, typically decrease their portfolios' volatility. That is, diversification reduces the risk of long term losses in a portfolio and tends to smooth out the annual returns. Effective diversification is based on long-term asset class behavior, not just recent years' behavior.
How does The Proper Analysis control risk?
By avoiding concentration (the use of only one or two types of securities). Concentration can produce dramatic (but sometimes terrible) results. Diversification is the key. It gives the investor exposure to more asset classes and with good long-term results, but volatility is reduced dramatically and greater long-term consistency is achieved.
Please explain "the multi-manager" approach?
Every portfolio consists of six basic segments, each focused on a special area. Investments in each segment are spread amoung three to ten different no-load mutual funds. Funds are selected by screening and analyzing published data. Selected mutual fund managers are interviewed and monitored closely. Portfolios at The Proper Analysis own thousands of individual securities in dozens of funds. A money manager, who purchases individual securities, would need to use very small positions to achieve the same degree of diversification. That cannot be done on a cost-effective basis, so even if a money manager did know enough about each issue to want to use them all, he or she would find it virtually impossible to implement such a plan. Using multiple managers is a standard risk-control technique for multi-billion dollar accounts. We believe individuals deserve the same careful control.
What criteria do you use to select fund managers?
All managers are measured quantitively against their peers. Qualitative measurement is gleaned through manager interviews and published material. Every manager is reviewed every quarter. Rates of return are risk-adjusted. Rates of return are normally long-term: 5-year rolling averages are important. Consistency is sought.
What is it like to work with an investment firm like yours?
It is pretty much up to the client to decide how much interaction we will have. Typically, we spend a lot of time with clients at the outset, partly becuase of the initial paperwork, but mostly because that's the time when we need to explore what the clients' expectations really are and to explain how we will design their portfolios to meet their goals. After the first month or two, we like to talk with clients each quarter, but if the clients want more contact, they are free to e-mail, to call or to make appointments to come in to see us. Normal response is 24 to 48 hours.
How do you select investments?
Every investment security is selected to fulfill a need in the client's portfolio. Before we select any investment vehicles, we analyze the client's needs. Only then do we design the portfolio. And only after designing a portfolio, that can be expected to reach the client's goals at the lowest possible risk, do we start selecting securities.
Then, once the portfolio has been designed, we select securities based on their ability to fulfill a function for the portfolio. Some securities are selected to enhance the overall return of the portfolio. Others are selected to reduce risk. Some do both.
In short, we seek to provide the safest way for our clients to earn the returns they seek. The factor we consider most important in our screening process is a sound fundamental strategy. That means, for example, that we avoid managers who try to time the market. Managers must have a proven history of executing their strategies in a disciplined way; they cannot follow each new investment fad. We are extremely cost conscious, so we seek out low-cost funds for our clients' accounts. Where appropriate, we use index funds. We are aware that many of our clients pay taxes on their investment returns, and we are very careful to analyze the tax consequences of portfolio managers' transactions as well as our transactions.
What actions does The Proper Analysis take to provide services to its clients?
- Providing Account Analysis and Planning
- Developing an Investment Policy Statement
- Designing and Implementing an Investment Strategy
- Rendering Asset Allocation Recommendations based on risk tolerance, time horizon, and net worth
- Selecting Mutual Funds on Clients' Behalf
- Rebalancing the Portfolio
- Monitoring Performance of Mutual Funds and the Portfolio
- Providing Quarterly Performance Data
- Contacting Clients at Least Quarterly
Do you have case studies?
- Age/Time Horizon
- Income Needs
- Net Worth
The last 3 are pretty much based on facts. So it is the first issue - risk tolerance - that will determine how the assets will be invested.
A. You've asked me about a 40-50 year old who has sold his or her business or has inherited. Before investing, we need to know what the client's net worth and income needs are. Will he or she continue to work?Does the investment pool NEED to grow or is it just a good idea to have it grow? We will work with the client to determine the critical issues: does the client have a realistic understanding of how much wealth he or she has and how that wealth may produce the income he or she will need over the next 40-50 years?
We work with clients to determine if their comfort level with investing for growth matches their need for building wealth. Over time, as net worth changes, clients might become increasingly comfortable with investing, and we might, at their discretion, help them build their net worth more effectively through investing for growth, not just protecting assets from inflation.
Each quarter, we review with clients their portfolio's past performance and outlook for the furture. We seek to determine whether any change in the client's financial circumstances or objectives would dictate a change in the strategic plan for his or her investment program.
B. You've asked me about how we would work with you if you are planning for your retirement. As ever, the first step would be to analyze your situation and identify your objective. That is, we would need to learn when you plan to retire and what you expect your living expenses to be in retirement. We would check the adequacy of your savings to enable you to live as you'd like in retirement. If a larger asset base will be required, we would encourage additional saving and growth-oriented investing.
Years later when you do retire, we would set up a monthly withdrawal schedule. The beauty of a well-diversified porfolio of no-load mutual funds is that you can very efficiently and effectively maintain the portfolio's balance and integrity even while you're making regular withdrawals.
As I said at the outset, three of the key factors that determine a personal customized portfolio are age, net worth, and income needs. Working with an investment adviser keeps the dynamic process of money management up to date on the inevitable changes in those factors.