Our Investment Strategy
We have our own Investment Committee to perform in-depth research of the overall health of the market and on specific investments. Each week, we examine multiple indicators including, but not limited to: new highs and lows, market breadth, greed/fear indicators, price-earnings ratios, interest rates, relative strength, Bollinger Bands, and bond prices.
Once our review reveals the big picture, we drill into the specific investments within each client portfolio. To be sure they are performing as expected, we examine each holding in every model against certain standards. Investments performing up to standard or above are left alone. If we find an investment is underperforming – particularly during a market downswing – we seek a replacement that is more appropriate.
We do not necessarily make changes every time we perform an analysis – if the current holdings in our models are performing as expected, they are left unchanged until the next analysis.
Using technical and fundamental analysis, we attempt to identify the current investment cycle and evaluate market risk. This process drives McDaniel Knutson's overall asset allocation decisions. We then utilize a risk-adjusted trend analysis approach to attempt to identify and invest in the strongest sectors, asset classes, and specific investment funds.
During periods of generally rising markets, known as Secular Bull Markets, one can generally buy and hold with a high expectation of making money. The opposite holds true during Secular Bear Markets. In the past 121 years, there have been five bull markets and four bear markets. A close examination of the chart below shows that the stock market experiences huge swings during bear markets. These periods require a more active investment approach. If we can capture gains made during those upswings and step aside during downswings, then we can still make profits. You can see there are several instances in the past century in which the U.S. market has made no net gains for as long as 25 years.
Investment Portfolio Allocation Strategies
McDaniel Knutson utilizes an objectives-based portfolio management approach. We start by identifying your primary objectives classified according to risk in the following categories:
Conservative Income seeks to provide current income and preservation of capital in the long term. Investors should be willing to accept a small level of principal volatility. Investments are primarily in fixed income securities.
Moderately Conservative seeks to provide income and some growth in the long term. Investors should be willing to accept a slightly higher level of principal volatility than purely conservative investors. The portfolio will be invested, on average, approximately 30% equities, 70% fixed income securities.
Moderate seeks long-term growth of capital and current income. Investors in pursuit of this objective should be willing to accept a moderate degree of principal volatility. The investment allocation will be up to approximately 60% equities and 40% fixed income securities.
Moderately Aggressive seeks long-term growth of capital with current income as a secondary consideration. Investors should be willing to accept a moderate degree of principal volatility. The portfolio will be approximately 80% equities, 20% fixed income securities.
Aggressive seeks long-term growth of capital with minimal consideration of income. Investors should be willing to accept a higher level of portfolio volatility. Investments are primarily in equities.
We utilize a variety of strategies to tailor the portfolio to specific client objectives. The precise mix of strategies depends upon client risk tolerance, tax sensitivity, income and growth goals as well as time frame. We also identify strategies as buy and hold, tactical, or dynamic as described below:
- Buy and hold means we buy the security and tend to hold on to it for the long term. We continue to monitor and will sell it if it stops performing as expected or moves out of line with its peer group.
- Tactical means that we always hold a certain amount in various securities, but will vary the percentage. For example, the allocation to stocks may never go to zero but may fluctuate between 30% and 60%.
- Dynamic means we rotate between different types of securities depending upon trend or risk.
- The following is a brief description of each investment strategy which may be combined as we seek to achieve the portfolio objective:
Fixed Income invests primarily in bonds or institutional real estate. This is a buy and hold strategy that can be customized for taxable or tax-deferred accounts.
Preferred Stock is a buy and hold strategy which invests in preferred, as opposed to common stock. Preferred stock may have lower risk and typically pays a higher dividend than common stock. It is thinly traded, making it appropriate for a buy and hold portion of a portfolio.
Dynamic Bond rotates between all types of bonds (government, corporate, foreign and municipal) and other conservative investments like institutional real estate or preferred stock funds. Positions are determined primarily upon the trend. The objective is to preserve principal while earning a rate of return greater than the Barclays Aggregate Bond Index. Returns are taxable income and mostly short-term gains, making it best suited for tax-sheltered accounts.
All-Star Moderate invests in a portfolio of balanced, moderate risk funds with positive reward/risk ratios. This is a tactical strategy utilizing the expertise of fund managers with diverse approaches to managing risk. It is suitable for both taxable and tax-exempt accounts.
Dividend Income invests in securities which pay above average income and which display moderate levels of risk. The objective is income and capital appreciation. This is a buy and hold approach, though stop-losses may be used with certain securities. Some dividends may be qualified but the strategy works best in tax-deferred and tax-free accounts. Issuers typically declare regular dividends, but they are not guaranteed. ($30,000 minimum)
All-Star Growth invests in a diversified portfolio of growth funds, each of which has a positive reward/risk ratio. This is a buy and hold portfolio. The objective is to match market returns during bull markets, but lose less than the market during bear markets. It is appropriate for accounts of less than $25,000 in size.
Core Growth invests in a diversified portfolio of Exchange Traded Funds (ETFs) to obtain broad exposure to primary US and global markets, including equities, real estate and natural resources. This is a buy and hold portfolio and subject to substantial market swings. It is tax sensitive, making it a good option for taxable accounts. ($25,000 minimum)
Opportunity Growth invests in about ten securities, primarily stocks, which we believe have exceptional growth potential in the coming years. This is primarily a buy and hold portfolio, with limited uses of stop-loss orders. Securities are chosen based upon their fundamental strength. This strategy is aggressive because fewer positions are held and diversification opportunities are limited. Because of the possibility of large realized capital gains, it is most appropriate in tax-deferred and tax-free accounts. ($30,000 minimum)
Dynamic Growth invests in three sectors of the market showing strength relative to the S&P 500. It can invest in any sector including bonds or cash. That makes the risk profile of the strategy dynamic as well depending on the landscape of the broad market. Due to the possibility of large realized capital gains, it is most appropriate in tax-deferred and tax-free accounts. ($25,000 minimum)
These strategies are implemented using a variety of investment vehicles. The vehicles chosen depend upon several factors including liquidity, diversification, taxation and cost. Investment vehicles include the following:
- Direct Ownership of stock or bonds
- Exchange Traded Funds (ETFs)
- Exchange Traded Notes (ETNs)
- Unit Investment Trusts (UITs)
- Mutual Funds
- Closed-End Funds (CEFs)
- Real Estate Investment Trusts (REITs)
- Master Limited Partnerships (MLPs)
In summary, at McDaniel Knutson, we attempt to bring together the best investment options and strategies into a portfolio designed to achieve your objectives in the most efficient manner. We want to help you realize your dreams and goals and feel more confident about your financial future.
Logarithmic graph of the Dow Jones Industrial Average from 1897 through 12/2017. Source: Graph created by Guggenheim Investments using data from www.dowjones.com. The Dow Jones Industrial Average is unmanaged and unavailable for direct investment. Returns do not reflect any dividends, management fees, transaction costs or expenses. (source: Guggenheim Investments 12/2017)
Past performance is not an indication or guarantee of future results. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful. Asset allocation cannot eliminate the risk of fluctuating prices and uncertain returns. A diversified portfolio does not assure a profit or protect against loss in a declining market.
The return and principal value of bonds fluctuate with changes in market conditions. If bonds are not held to maturity, they may be worth more or less than their original value.
Exchange-traded funds are sold only by prospectus. Please consider the investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the investment company, can be obtained from your financial professional at 2500 W 31 St Ste B, Lawrence, KS 66047. Be sure to read the prospectus carefully before deciding whether to invest.