Construction

Investment portfolios are carefully constructed using each investor's asset allocation as a blueprint. Asset classes typically include stocks, bonds, real estate (REITs) and cash. Each of these core asset classes possesses valuable characteristics, such as growth potential, income generation, inflation protection and capital preservation. The work of Nobel Prize-winning financial economists demonstrates that combining such asset classes in a diversified portfolio results in higher returns with less risk as compared to non-diversified portfolios.

Once an asset allocation is established, we focus on engineering each investment portfolio to maximize returns for a client's chosen level of risk. We diversify portfolios by introducing a number of asset classes exhibiting low levels of correlation, including, but not limited to: small and large value stocks, micro cap stocks, real estate equity securities, and international and emerging market small cap stocks. These asset classes represent an enormous opportunity that most investors miss.

Within the context of a diversified portfolio, we favor small company and value stocks across U.S., international and emerging markets. A number of highly-respected academics have spent their entire careers conducting rigorous research into determining what drives equity returns. Their research strongly suggests that stocks of smaller and more distressed companies outperform their larger and growth-oriented peers over long periods of time.

We generally favor special institutional mutual funds not normally available to the investing public when building portfolios, primarily because of their lower costs relative to actively managed funds. Investment costs vary in form (management fees, transaction costs, tax costs, and cost of holding cash) but are always a direct subtraction from investors' share of returns. For the average actively managed mutual fund, these costs can amount to nearly 3% per year—the amount by which they must outperform their benchmark index just to match the market return. The vast majority fail to succeed. By their very nature, passively managed funds minimize these costs and thus deliver superior long-term performance compared to actively managed funds.

Whenever possible, portfolios comprised of both taxable and tax-deferred accounts are managed on a "consolidated" basis. All accounts are collectively viewed as one portfolio with each account holding different parts of the overall asset allocation. This asset location decision refers to placing the most highly taxed assets in tax-deferred accounts, while putting more lightly taxed assets in taxable accounts. This approach enhances after-tax returns and reduces trading costs.

Monitoring

Once the portfolio is constructed, the focus naturally shifts to monitoring the portfolio. Keeping a portfolio on track to meet long-term goals requires diligence and discipline. Many investors find this challenging in the "information age" with the constant chorus of voices suggesting new investment strategies every day. Here the investment plan proves invaluable in deflecting the short sighted urgings of the media and the natural impulse to follow the latest investment fad. Orion regularly monitors portfolios, making changes only when warranted by the investment plan, specific investor circumstances, or when a superior investment alternative becomes available.

Rebalancing

Over time, performance of the various asset classes will cause them to drift from their allocation targets. Preserving the proper mix of investments through time is critical to the portfolio's long-term success. Periodic rebalancing is a key component to an effective investment plan. To minimize trading costs, Orion allows positions to fluctuate within a specified range from the target. Rebalancing back to the target allocation occurs once the minimum or maximum threshold has been reached. This discipline keeps portfolio risk at the appropriate level. It also enforces the investment ideal of selling high and buying low, an effective remedy for the average investor who routinely sells laggards to buy leaders just as their respective fortunes reverse.

Regularly re-deploying cash also serves to rebalance the portfolio. Cash routinely accumulates in a portfolio from interest, dividends, mutual fund distributions, and investor deposits. Re-investing cash according to the target asset allocation helps keep the portfolio on track.

Review

Periodic portfolio reviews with each investor are an integral part of the investment management process. These regular meetings help ensure that the investment plan and portfolio remain consistent with the investor's changing needs. The knowledge and understanding derived from these ongoing interactions help build the confidence necessary to adhere to a long-term investment plan, even when short-term market trends make doing so uncomfortable.