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Individualized Portfolios
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The Griffin Black approach to investing is based on finding an appropriate fit for each client’s individual needs and circumstances. Rather than taking a generalized approach, we believe that portfolios should be designed with an eye toward a client’s specific context. Factors that contribute to this context include the client’s desire for potential gain, his capacity to withstand loss, the investment time horizon, and the emotional background of the investor himself – among others.
As a result of this client-centric approach, we begin the investing process by examining the role that investing plays in each client’s overall financial framework. For most clients this role is properly one of savings enhancement. For others it is capital preservation. For a few it can be return maximization. In each case, we attempt to clarify what a client is reasonably able and willing to risk in return for the opportunity to achieve a potential return. We bear in mind that there will be times when it is better to avoid the possibility of loss than it is to achieve a wished-for return. That said, we also remind clients that investing involves legitimate trade-offs and that the price of certainty is usually an opportunity set that is more modest than the opportunity set which is available to risk-takers.
Asset Allocation Strategy
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Asset allocation is probably the most important tool we have to construct client portfolios that meet specific needs and circumstances. There are two reasons to care about asset allocation within a portfolio: return enhancement and portfolio risk (volatility) reduction. In spite of the questions that have been raised lately regarding the application of Modern Portfolio Theory (MPT) to asset allocation, some elements of classic investment theory appear to be as solid as ever. For example, few intelligent investors doubt that diversification both reduces risk and enhances long-term portfolio returns. It is not this core idea that has recently been called into question. What has been criticized – and rightly so – is the certainty with which we can presume to apply past statistics about investment risk, investment returns, and asset class correlations uniformly to our projections of future investment results. And the answer to this question appears to be that we cannot be as certain about future results based on past experience as some individuals had thought.
At Griffin Black, we have always considered Modern Portfolio Theory to be useful but neither absolute nor exact. For one thing, valuations matter. And while most investment programs do not explicitly take this idea into consideration, the Griffin Black approach does. Though we establish “neutral” (i.e. long-term average) portfolio allocations as a guideline for each client, we construct actual client portfolios based on “tactical” allocations that take current valuations into account. In other words, while it may be interesting to note that intermediate-term government bonds have returned an average of 7.44% over the past 30 years, we believe it highly unlikely that they will do so over the next three, given current valuations and economic circumstances, and therefore we invest accordingly.
Another area in which certain widespread investment practices have been rightly criticized is the treatment of extreme circumstances – realities with which we all have had recent and painful experience. At Griffin Black, we have a bias toward preservation of capital. Because we are long-term investors, we do not believe that it is possible – or even prudent – to try to time market declines by selling at the first sign of price volatility. Our focus on valuations, however, helps us to cut back on positions whose pricing we do not think can be sustained over the long term, and this in turn helps us better manage the downside risk in our clients’ portfolios.
Finally, it is our experience that investment performance is an ever evolving phenomenon. The best investment for the next ten years may not have done well over the past ten. It may not even be an investment that is currently in the mainstream. We therefore strive to continually test new investment ideas and expand on new but well-thought-out investment successes – while maintaining a more traditional approach to the core of each client’s portfolio.
If you would like more detailed information on specific investing areas, please refer to the additional topics listed on this page.
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