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The graphs below describe how we think about asset classes in the portfolio. Depending on a client’s goals, objectives, risk tolerance and time horizon we develop recommendations from this universe of asset classes. By combining the four portfolios we optimize risk adjusted returns along the efficient frontier.

We do not recommend investing in any of these portfolios by itself without professional assistance. Each of the asset class portfolios is diversified within itself. However, with the exception of the Cash portfolio, they are not uncorrelated within. Each complete asset class portfolio (Cash, Debt, Equity, Alternatives) is intended to be non-correlated with each other (low covariance). Some investors may not use all the portfolios. In times of crisis, the three non-cash portfolios may be highly correlated. For this reason they should be treated with care.

Thought we have included Ecosystem Services in the Alternatives model, we do not presently apply this portion because the markets are not yet mature.

We generally apply a simplified version of the Black-Litterman model (Black 1992)[i] to arrive at the combined portfolios. The Black-Litterman model is recommended by both Zimmerman Et Al. 2003[ii] in Global Asset Allocation: New Methods and Applications and in Investments by Bode Et Al. 2008[iii] as a reasonable methodology for professional practitioners to apply what academic literature suggests.

For additional details about the properties of the asset classes described please see this Modern Portfolio Theory (MPT) Asset Class Research 2000-2011.

Investment Risks

• There are risks involved with investing, including possible loss of principal.
• Diversification does not guarantee against loss of principal. There can be no assurance that an investment strategy based on the asset allocation we recommend will be successful.
• The portfolio recommended by your investment professional is not FDIC insured, has no bank guarantee, and may lose value.