Methods of Analysis and Investment Strategy
XYIS’s services are based on long-term investment strategies incorporating the principles of Modern Portfolio Theory. XYIS’s investment approach is firmly rooted in the belief that markets are “efficient” over long periods of time and that investors’ long-term returns are determined principally by asset allocation decisions, rather than market timing or stock picking. XYIS recommends diversified portfolios, principally using passively managed, asset class mutual funds and ETFs.
Although all investments involve risk, XYIS’s investment advice seeks to limit risk through broad diversification among asset classes and. XYIS’s investment philosophy is designed for investors who desire a buy and hold strategy. Frequent trading of securities increases brokerage and other transaction costs that XYIS’s strategy seeks to minimize.
In the implementation of investment plans, XYIS therefore primarily uses mutual funds and may also utilize Exchange Traded Funds (ETFs) to represent a market sector.
Clients may hold or retain other types of assets as well, and XYIS may offer advice regarding those various assets as part of its services. Advice regarding such assets will generally not involve asset management services but may help to more generally assist the client.
XYIS’s strategies do not utilize securities that we believe would be classified as having any unusual risks, and we do not recommend frequent trading, which can increase brokerage and other costs and taxes.
XYIS receives supporting research from East Bay Financial Services and from other consultants, including economists affiliated with Dimensional Fund Advisors (“DFA”). XYIS may utilize DFA mutual funds in client portfolios. DFA mutual funds follow a passive asset class investment philosophy with low holdings turnover. DFA provides historical market analysis, risk/return analysis, and continuing education to XYIS.
Analysis of a Client’s Financial Situation
In the development of investment plans for clients, including the recommendation of an appropriate asset allocation, XYIS relies on an analysis of the client’s financial objectives, current and estimated future resources, and tolerance for risk. To derive a recommended asset allocation, XYIS may use a Monte Carlo simulation, a standard statistical approach for dealing with uncertainty. As with any other methods used to make projections into the future, there are several risks associated with this method, which may result in the client not being able to achieve their financial goals. They include:
- The risk that expected future cash flows will not match those used in the analysis
- The risk that future rates of return will fall short of the estimates used in the simulation
- The risk that inflation will exceed the estimates used in the simulation
- For taxable clients, the risk that tax rates will be higher than was assumed in the analysis
Risk of Loss
Investing in securities involves risk of loss that clients should be prepared to bear.
All investments present the risk of loss of principal – the risk that the value of securities (mutual funds, ETFs and individual bonds), when sold or otherwise disposed of, may be less than the price paid for the securities. Even when the value of the securities when sold is greater than the price paid, there is the risk that the appreciation will be less than inflation. In other words, the purchasing power of the proceeds may be less than the purchasing power of the original investment.
The mutual funds and ETFs utilized by XYIS may include funds invested in domestic and international equities, including real estate investment trusts (REITs), corporate and government fixed income securities and commodities. Equity securities may include those of any size market capitalization. Mutual funds and ETF shares invested in fixed income securities are subject to the same interest rate, inflation and credit risks associated with the underlying bond holdings.
Among the riskiest mutual funds used in XYIS’s investment strategies funds are the U.S. and International small capitalization and small capitalization value funds and emerging markets funds. Conservative fixed income securities have lower risk of loss of principal, but most bonds (except for Treasury Inflation Protected Securities, or TIPS) present the risk of loss of purchasing power through lower expected return. This risk is greatest for longer-term bonds.
Certain funds utilized by XYIS may contain international securities. Investing outside the United States involves additional risks, such as currency fluctuations, periods of illiquidity and price volatility. These risks may be greater with investments in developing countries.
More information about the risks of any market sector can be reviewed in representative mutual fund prospectuses managing assets within each applicable sector.