Our Approach to Investment Management
Investment management is an important part of our comprehensive wealth management services.
Prospective clients often ask questions like, “Can you beat the index over 10 years?” They may mean a stock market index like the S&P 500 — also called a “market capitalization index”.
Investing this way is called momentum investing. Funds that follow an index tend to buy what is already in favor and sell what has already gone down in value — so they end up buying higher and selling lower.
For example, as a company gets more popular and expensive, an S&P index fund will buy more of it even though it’s becoming overvalued. If another company is struggling temporarily and losing value, the fund will sell shares of that stock even though the fundamentals of the company remain strong.
You might want to do the opposite. This is called being a contrarian investor, and it is what we generally practice. In the example above, we would sell the strong company’s stock at a profit and buy the struggling company, looking for a gain when the company rebounds.
Momentum investing performs well in a bull market — when the stock market is on the rise. A market cap index fund will often outperform a diversified portfolio in a bull market. In a bear market, when the market is down for a sustained period, a diversified portfolio might outperform an index fund.
In addition to being contrarian when it comes to which stocks to buy and sell, we are also contrarian in our timing. We invest more when the market is down.
During the COVID-19 pandemic, we bought stocks (as suitable for our clients) at four pre-determined valuation trigger points — for example, when the S&P 500 total value hits 3600. Our purchases are based on data — valuations and what is on sale — not on emotion like a sell-off in panic when the market is down. During the 2022 inflation-induced bear market, we have also identified several buying points and are regularly implementing them (as suitable for our clients).
Basing decisions on data
Even though there are many ways to value a company, it is easier to see when something is undervalued or overvalued than it is to speculate on where it will go in the future. The current valuation is a firmer piece of data.
It is possible that our portfolios could perform worse than the index fund in years we are purchasing undervalued stocks because the index fund stock allocation reduces as the market falls, while we are buying more stock as the market falls. But our clients are also likely to come out better in the years that follow as the market rebounds and those positions we bought at lower values provide gains.
A well-managed portfolio is generally going to diverge from the results of a market cap index because strategies are employed that help you buy lower and sell higher.*
Almost every client at Laurel Wealth Planning has a customized portfolio. With our 20:1 client-to-staff ratio, we know our clients well, which helps enhance their results.
There are three keys to building a portfolio that matches a client’s needs and preferences:
We plan what to sell and when based on our clients’ capital gains strategy.
We create charitable giving strategies that have tax advantages.
They may accept a lower return or more volatility to a certain point on these investments compared with others they hold purely for performance.
These portfolios might invest in different industries than a standard portfolio. This can lead to either better or worse results than a standard portfolio or an index depending on performance of those industries.