Wealth-Building Made Simple

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Investing principles that guide our decision making process: "Asset allocation is the major driver of returns"

An entire book can be written on all the major asset classes, but to avoid nerding out on you, let’s stick to the major stock asset classes used by the research company Morningstar that many financial advisors and institutional investors use to analyze portfolios, plus bonds and a few specialty asset classes.  

Major stock asset classes (Click on asset class to link out to the Investopedia definition)

Size:

Large-Cap

Mid-cap

Small-cap

 

Style:

Value

Blend

Growth

 

Bonds: Interest rate sensitivity

Limited

Moderate

Extensive

 

Bonds: Credit quality (like credit score)

High

Medium

Low

 

Specialty:

Precious metals

Commodities

 

The economic environment is the major driver of which assets outperform and under-perform.  

I’m going to simplify the economic environments as well:

The global economy is expanding and inflation is falling.

The global economy is expanding and inflation is rising.

The global economy is in recession.  

 

Keep in mind that many times (if not most of the time) different economies are in recession and/or expanding at different times.  

If you really want to get fancy, you can build a portfolio placing micro bets on different economies. However, there’s also a major global trend you can build your portfolio around as well and also do well overtime.  

The global economic trend is the trend I like to focus on and what I’m referencing in this post.  

Here are the asset classes that tend to do relatively well in each economic environment:

The global economy is expanding and inflation is falling:

Large-cap stocks

Growth stocks

Bonds

Credit quality: High

Interest rate sensitivity: Extensive

 

The global economy is expanding and inflation is rising:

Small-cap stocks

Value stocks

Precious metals

Commodities

 

The global economy is in recession:

Bonds

Credit quality: High

Interest rate sensitivity: Extensive, Moderate, and Limited

 

If Asset allocation is the major driver of returns, and the economic environment is the major driver of which assets outperform and under-perform, then understanding how to determine the economic trend is EXTREMELY important in investment process for Stone Hill Wealth Management.  

How to determine the economic trend (not predict it) that's mostly an art, but here are the 4 core things I analyze that have the most impact on determining the trend:

Global trade trend

Valuations

Central bank policy

How different asset classes are moving relative to each other

 

Phillip Washington, Jr.  is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Investing principles that guide our decision making process: "Asset allocation is the major driver of returns"

An entire book can be written on all the major asset classes, but to avoid nerding out on you, let’s stick to the major stock asset classes used by the research company Morningstar that many financial advisors and institutional investors use to analyze portfolios, plus bonds and a few specialty asset classes.  

Major stock asset classes (Click on asset class to link out to the Investopedia definition)

Size:

Large-Cap

Mid-cap

Small-cap

 

Style:

Value

Blend

Growth

 

Bonds: Interest rate sensitivity

Limited

Moderate

Extensive

 

Bonds: Credit quality (like credit score)

High

Medium

Low

 

Specialty:

Precious metals

Commodities

 

The economic environment is the major driver of which assets outperform and under-perform.  

I’m going to simplify the economic environments as well:

The global economy is expanding and inflation is falling.

The global economy is expanding and inflation is rising.

The global economy is in recession.  

 

Keep in mind that many times (if not most of the time) different economies are in recession and/or expanding at different times.  

If you really want to get fancy, you can build a portfolio placing micro bets on different economies. However, there’s also a major global trend you can build your portfolio around as well and also do well overtime.  

The global economic trend is the trend I like to focus on and what I’m referencing in this post.  

Here are the asset classes that tend to do relatively well in each economic environment:

The global economy is expanding and inflation is falling:

Large-cap stocks

Growth stocks

Bonds

Credit quality: High

Interest rate sensitivity: Extensive

 

The global economy is expanding and inflation is rising:

Small-cap stocks

Value stocks

Precious metals

Commodities

 

The global economy is in recession:

Bonds

Credit quality: High

Interest rate sensitivity: Extensive, Moderate, and Limited

 

If Asset allocation is the major driver of returns, and the economic environment is the major driver of which assets outperform and under-perform, then understanding how to determine the economic trend is EXTREMELY important in investment process for Stone Hill Wealth Management.  

How to determine the economic trend (not predict it) that's mostly an art, but here are the 4 core things I analyze that have the most impact on determining the trend:

Global trade trend

Valuations

Central bank policy

How different asset classes are moving relative to each other

 

Phillip Washington, Jr.  is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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During college football season, people always ask me, "Phillip, why do you like Alabama Football? You didn't even go there and you're from Texas."

Well the truth is, I don't really like Alabama football. I like Nick Saban. He is a process guy like me. The success of his team has less to do with his superior player selection. His success comes from his process.  

He has designed a simple, consistent process that allows his teams to be a championship contender year in and year out. He did the same when he was at LSU.  

You see the same thing in investing. The best investors are not great stock pickers.  

They are the best at sticking to their well thought out and evidence based process.  

Principle 1) Asset allocation is the major driver of returns

Definition: How much money you put into different asset classes

Principle 2) The economic environment is the major driver of which assets out-perform and under-perform

Economic expansion

Economic recession

Rising inflation

Falling inflation

Principle 3) Lower cost funds tend to outperform higher cost funds over time

I don’t necessarily look for the lowest cost fund, just the funds that score relatively low that also scores well on all of my other criteria.  

Principle 4) Low tracking error is important when selecting funds that track an index

I don’t necessarily look for the lowest tracking error fund, just the funds that score relatively low that also scores well on all of my other criteria.  

Principle 5) A culture of stewardship is more important that rules and regulations

You can tell a lot more about a fund company (or stock) by watching, listening, and/or speaking to the leaders and employees. You can fake numbers. You can’t fake a culture of stewardship (putting the needs of the people you serve ahead of your own).  

Principle 6) There is no such thing as a “safe” investment therefore, diversification is one of the best risk management strategies to implement when looking to grow and protect your wealth. 

Principle 7) Patience is a required character trait of successful investors

 

How do I use these principles to create portfolios?  

Here are the steps I use:

Create a financial plan and/or an Investment Policy Statement based on my clients’ goals, timeframe and objectives. 

Use fundamental, economic, and technical analysis to determine which economic environment we are currently in (no need to predict the future) which allows me to know which asset classes I would like to invest more money into and/or less money into.

Select a diversified group of investment funds that invest in the asset classes I need to build the portfolio that are low cost with low tracking error from a company with a culture of stewardship. 

Encourage and advise my clients to be patient. I have yet to meet anyone who has built long-term wealth overnight.  

There are a lot of systems and moving parts behind the scenes that go into building and managing this process, but it’s as simple (not easy) as it sounds.  

Phillip Washington, Jr.  is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

Powered by Stone Hill 401(k)

During college football season, people always ask me, "Phillip, why do you like Alabama Football? You didn't even go there and you're from Texas."

Well the truth is, I don't really like Alabama football. I like Nick Saban. He is a process guy like me. The success of his team has less to do with his superior player selection. His success comes from his process.  

He has designed a simple, consistent process that allows his teams to be a championship contender year in and year out. He did the same when he was at LSU.  

You see the same thing in investing. The best investors are not great stock pickers.  

They are the best at sticking to their well thought out and evidence based process.  

Principle 1) Asset allocation is the major driver of returns

Definition: How much money you put into different asset classes

Principle 2) The economic environment is the major driver of which assets out-perform and under-perform

Economic expansion

Economic recession

Rising inflation

Falling inflation

Principle 3) Lower cost funds tend to outperform higher cost funds over time

I don’t necessarily look for the lowest cost fund, just the funds that score relatively low that also scores well on all of my other criteria.  

Principle 4) Low tracking error is important when selecting funds that track an index

I don’t necessarily look for the lowest tracking error fund, just the funds that score relatively low that also scores well on all of my other criteria.  

Principle 5) A culture of stewardship is more important that rules and regulations

You can tell a lot more about a fund company (or stock) by watching, listening, and/or speaking to the leaders and employees. You can fake numbers. You can’t fake a culture of stewardship (putting the needs of the people you serve ahead of your own).  

Principle 6) There is no such thing as a “safe” investment therefore, diversification is one of the best risk management strategies to implement when looking to grow and protect your wealth. 

Principle 7) Patience is a required character trait of successful investors

 

How do I use these principles to create portfolios?  

Here are the steps I use:

Create a financial plan and/or an Investment Policy Statement based on my clients’ goals, timeframe and objectives. 

Use fundamental, economic, and technical analysis to determine which economic environment we are currently in (no need to predict the future) which allows me to know which asset classes I would like to invest more money into and/or less money into.

Select a diversified group of investment funds that invest in the asset classes I need to build the portfolio that are low cost with low tracking error from a company with a culture of stewardship. 

Encourage and advise my clients to be patient. I have yet to meet anyone who has built long-term wealth overnight.  

There are a lot of systems and moving parts behind the scenes that go into building and managing this process, but it’s as simple (not easy) as it sounds.  

Phillip Washington, Jr.  is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

This episode is brought to you by Stone Hill 401(k), a service offered by Stone Hill Wealth Management.