Prudent Investing
Prudent Process
Ely Prudent Portfolios, LLC manages investment portfolios based on modern prudent fiduciary practices. These practices help us navigate tough market conditions, set expectations, apply logic, and maintain discipline. This adherence to a prudent process is what separates investing from speculating.
Risk/Return Tradeoff
Our central consideration when investing and managing client assets is determining the tradeoff between portfolio risk and return.
Portfolio Balance
The first and most important step in balancing risk and return is the proper allocation of investment assets between cash, fixed income investments (bonds, certificates of deposit, etc.) and stocks. Each of these elements has a purpose in building a prudent portfolio. Cash is needed for liquidity. Bonds are used to stabilize portfolios. Stocks are for growth.
Time Horizon
The time horizon is a key factor in balancing a portfolio. For short-term portfolios, safety of principle is the most important consideration. As the time horizon lengthens, growth becomes an increasingly important consideration.
Diversification
Stock diversification depends more upon how securities relate to each other than on the number of securities in a portfolio. By focusing on the relationship between different types of stocks instead of trying to guess the best performers, it is possible to reduce portfolio risk while at the same time increasing potential return. This "free lunch" is the objective of efficient diversification. It works because of the mathematics of investing: losses have a bigger impact than gains of the same magnitude.
Conversely, investors (both professional and amateur) who do not diversify efficiently because they are chasing "winners" may actually be decreasing the probability of long-term success.
Index and Institutional Asset Class Funds
Index and asset class funds are the most efficient and effective way to diversify portfolios. They are effective because they provide broad and constant diversification within asset classes. They are efficient because they provide this diversification at very low cost without wasting money on attempts to find undervalued stocks or to exploit short-term fluctuations in markets.
Rebalancing
Rebalancing is nothing more than selling securities that have risen in value and buying ones that have fallen. Its purpose is to keep risk and return in balance by keeping your portfolio's allocation in line with your targets. It also enhances returns by causing investors to buy low and sell high. Regular rebalancing is one of the most effective factors in determining long-term success. It is very simple to understand but, unfortunately, it is very difficult to do because it runs contrary to what our emotions tell us to do.
Costs
Reducing cost is one of the most important ways we can enhance performance. According to John Bogle, the founder of Vanguard Funds, “Costs matter. Indeed for the long-term investor, cost is the difference between success and failure.” Therefore, we incorporate strategies that control the visible expense costs, as well as the invisible transaction costs.
Taxes
Taxes reduce net returns so, for our taxable portfolios, we offer tax-managed strategies. These tax-managed strategies deliver the same consistent exposure to a broad spectrum of asset classes, but with a special emphasis on maximizing after-tax returns.
For retirement accounts, we develop tax-efficient distribution strategies that comply with the required minimum distribution laws.