EWA’s Investment Philosophy

Wealth Advisor and Partner

In their discussion, Jamison and the speaker emphasize four key principles for achieving long-term financial independence goals through the EWA investment philosophy. These principles are:

  1. Asset Allocation: The importance of diversifying investments across eight different asset classes to balance risk and return effectively. Proper asset allocation helps prevent overreliance on a single investment and ensures financial stability.
  2. Diversification: Diversifying within each asset class by investing in multiple companies. This reduces risk and makes the investment portfolio more resilient, similar to holding many pencils that are difficult to break compared to a single pencil.
  3. Long-Term Perspective: Advocating a long-term investment approach, as historical data shows that markets tend to grow over time. Short-term fluctuations are considered noise, and trying to time the market can be detrimental to long-term returns.
  4. Asset Location: Choosing the right type of accounts to hold specific investments based on their tax implications. For example, high-growth, higher-risk assets are better suited for tax-free accounts like Roth, while safer investments are more appropriate for tax-deferred accounts like a 401(k).

These principles are designed to create a balanced and resilient investment strategy that supports clients’ goals and objectives, allowing them to achieve financial independence while minimizing unnecessary risks. Regular review and adjustment of the plan are also highlighted as essential components of successful financial management.


Video Transcript

Jamison and I are going to talk about the EWA investment philosophy and certain concepts that we find are very important to reach your long -term financial independence goals. The first thing we want to address is there’s typically investing comes down to three things that we’re looking for.

These are three things specifically that our clients are looking for. We want to make sure our investment strategy clearly aligns and supports those. The first thing is return. We need to keep up with inflation and you need a good rate of return obviously to reach goals and hit a number in the future that will make you independent or will send your kids to college.

The second thing is peace of mind. And the third thing is time and what time provides, which is ultimately autonomy and complete control of your life. So the four things we’re going to talk about today that we believe, if implemented properly, will be a support system of those three factors.

If these are not implemented correctly, then typically what we see is our client’s lives become dependent on their money. And we want to flip that where the money is simply a support system for the client’s goals and objectives, Jamison. The first principle that we want to talk about is asset allocation.

And the purpose of asset allocation is making sure that we’re taking the appropriate amount of risk for whatever rate of return that we need. So when we look at asset allocation, these are eight different asset classes that we can invest the money into. And those asset classes would be large cap, small cap, and mid cap.

Those would all be invested in different U .S. companies. International Emerging, International Develop, who would be investing in companies or countries that are foreign or outside of the U .S. And then other asset classes would be real estate or fixed income and cash.

And if we look at how these have performed the past 15 years, one example would be we could look at real estate. Over the last 15 years, real estate’s averaged 7 .5% rate of return. But the amount of risk that we had to take to get that 7 .5% was about 23.

So what that means is a three to one risk to return ratio. Whereas if we’re properly allocated across all of these eight asset classes in asset allocated portfolio, his average of the last 15 years, this is if you’re invested in 60% stocks and 40% bonds, 6 .4%.

And the risk associated with that would have been 8 .9%. So almost a one to one relationship between risk and return. So the point of asset allocation is creating equilibrium between risk and return. And we want the highest return possible while taking the least amount of risk.

Jamison, that’s a very good example. Asset allocation is really what we view as the most important factor. If your kid’s in college and you’re in one asset class and the market has a COVID drop or a 2008 drop or even a 2000, 2001 technology drop, the reality is if you’re in an asset allocated portfolio, there will be segments of your portfolio.

You can still withdraw it again and not take a loss. A loss will only be experienced if you’re not in an asset allocation portfolio and your eggs are all in that one basket that’s suffering at the time. Asset allocation doesn’t guarantee the highest rate of return, but it certainly is appealing for goal -oriented investing and not worrying about what the market’s doing.

We want your life to be the forefront of what our plan is. And the market is just a side comment. Jamison, so asset allocation is covered. Tell us more about the second principle, which is diversification. So the principle of diversification, we want to invest in all eight asset classes, but within these asset classes, we want to be diversified and invest in multiple companies that would be associated with the same asset class.

In order for a fund or a portfolio to be diverse, it has to have 25 separate companies. The analogy that we like to use when thinking about diversification is if we were to hold a pencil in our hand, one pencil would be able to be snapped in half pretty easily, but if we were to hold 500 pencils tied together with a rubber band, it would be almost impossible, probably impossible to break that.

So same thing with diversification. One company could fail. We’ve seen that with Enron, many other examples throughout history, but if we’re invested in 500 companies, that takes a lot of the risk off the table.

Jamison, a common question that we get from clients is how many companies does it take to be diversified? So for example, in large cap, we’re saying, okay, we’ve got asset allocation, we’ve got the checkbox of large cap. How do we check the box for diversification?

So for a fund or portfolio to be considered diversified, it would need to be invested in 25 different companies. If you’re invested in 25 companies, that takes care of 80% of the risk associated with diversification, and if you’re invested in at least 100 companies, that takes care of 90% of the risk with diversification.

Great. So I think a quick analogy of everything, football, large cap, mid cap, small cap, that may be our quarterback, our wide receiver, our running back, and our offensive line, defensive line.

Diversification is saying, inside of that quarterback position, if our starter gets hurt, we’ve got a backup. So diversification is simply saying, we need multiple players to fill each position in case one player gets injured. Similar to the stock market, the more companies you have, the more diversified you are.

Jamison, thank you. That makes complete sense. All right. So I’ll be covering the last two principles. So the third principle, is any investment we believe is to be a long -term investment. We don’t know what the markets are doing the short term.

Based on historical data, in the long term, the market always goes up. The old adage is the stock market is simply a place where wealth gets transferred from inpatient investors to patient investors’ pockets. Some data to back that up is in 2000 through 2019, if you had a $100 ,000 investment, you plopped it in the S &P 500, fell asleep for 20 years, woke up 20 years later, you’d have $324 ,000.

So that’s if you stayed in the market for 7 ,300 days over those 20 years. If you had the same investment and the same things, $100 ,000 in the S &P 500, but you didn’t fall asleep, you watched the market every day, and as a result, you pulled in and out of it and you missed just the best 10 days of the 7 ,300 days, your return, if you missed the best 10 days, would have gotten cut in half.

So instead of $324 ,000, you’d have $161 ,000. So we like thinking about the stock market and the casino and the fact that you need to be the one owning the casino, not playing in the casino. If you stay long enough as a player, you’re going to lose all your money.

If you own the casino, you’re going to win all the money. Similar to the stock market, the market historically in the US, if we look at the S &P 500 is up 75% of the time, 25% of the time the market has a negative return. Whether it’s positive or negative, what we find is a misunderstanding is every year, looking back at the last 15 years, there’s been on average a 13 .8% pullback.

So if we think about 2020, for example, in March, the market dropped 34%. Well, if you put money in January, woke up at the end of the year, your return was double digits. That 34% drop was scary, but it was really irrelevant. So when we think about long -term investing, the advice we have is anything you put in the market has to be a time period of greater than five years for it to be in an equity.

And then the second thing is we never want to time the market. We see the market’s dropping, so if someone pulls out and then they put it back in later, it feels good to have missed on this little dip. But in reality, if we didn’t get it back until post -recovery, you just suffered.

And your portfolio suffered as we saw from these statistics because it’s really hard to time right twice. It may be easy to time right once, but the time right twice is nearly impossible and history proves that. With that being said, we do recommend investing as many equities as possible.

We’re big believers and equities is how you build wealth. However, you need to have a plan. A good plan will get you through a bad time. So this is where safe investments, such as fixed income and being asset -allocated overall, make sense.

If you’re retired, if your kids are in college, all that matters is that you have a portion of your portfolio to always pull out it again and ignore the market noise in the short term. So we’ll build wealth withholding long -term quality equities, patient investing, and then always have a good plan to get you through the bad time.

That’s inevitably going to happen almost on a yearly basis moving forward. All right, the fourth principle of our investment philosophy is what we call asset locations. Asset -allocation is being very careful with where we hold the investment. So again, football analogy, if we have our quarterback, we want him operating as our quarterback.

We don’t want him on the defensive line trying to get through with a big offensive line. His body is not built for that. That’s not the best use of that weapon. So similar to your investment portfolio, you may have a Roth account. You may have a pre -tax 401k account.

A taxable account. All of these accounts have different tax consequences. So in this example, a Roth account is where we want to hold those high growth, higher risk asset classes such as equities.

All of the growth under Roth is tax -free. All of the distribution, assuming you’re retired after 59 and a half is tax -free as well. So the government’s out of our pockets. We want the highest rate of return on the Roth.

The opposite is true for the 401k. If we’re looking for some safety in retirement, the 401k has required distribution starting at 72 and the government partakes in the fact that they tax every dollar that comes out of a pre -tax 401k in the back end.

So if we’re gonna have any fixed income, this is the place where it should go because, one, there’s what we call a sequence of return risk at 72. There’s a requirement that you pull money out of what’s called an RMD, required minimum distribution.

And then two, the government gets the tax every dollar that comes out. So if we’re gonna have some safe money, that’s where we put it. And the taxable account is typically the spillover where clients will put money once they have maxed out tax deferred options.

And a taxable account, you’re much better to hold equities because you’re never required to pull money out unless you want to. And you’re subject to a capital gain rate by holding equities instead of a ordinary income rate.

And typically capital gains are between 15 to 23 .8% whereas income rates can go up to 37%. So asset location, sounds very obvious, sounds very simple. A lot of times we see every account operating identically and we think that’s a big mistake.

You can generate about a half to 1% return, or we’ll call it alpha by getting asset location correct over the long term. If you have any questions on these principles, please reach out. We will constantly monitor and make sure that these principles are implemented.

And most importantly that they’re implemented in a way that achieves your specific goals. And those need to be reviewed on a very regular basis.

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