Make money, control risk, and stay focused on the long term.

 

While all investors are out to make money (or preserve what they have), most do a poor job of managing risk and few have the discipline to stick with a investment strategy through the inevitable tough periods. This is the nature of markets and investor psychology. 

 

Most investors pursue returns with little regard for risk.  Or worse, they perceive risk incorrectly. When markets are moving up, everyone wants in because past returns have been spectacular.  In these situations investors often have the false sense that risk is low.  Conversely, if recent returns have been poor, demand for investments declines and investors often see risk as high.  In reality, the opposite situation is usually true:  as markets rise - risk increases, as markets fall - risk declines. 

 

Too often, investors are influenced by short-term factors and recent market trends. Economic and political news can cause significant short-term market volatility.  Lacking a long-term focus, investors react to news or the latest market trend and shift assets from poorly performing areas to those that are doing well.  They move money from bonds to stocks to cash, from growth to value stocks, from large to small companies.  But they always seem to be a step too late.  Without a long-term perspective, their actions seem to be motivated by their eagerness to invest in whatever seems to be working at the time.

 

To take advantage of market situations, an investor must be willing to go against the crowd when things look bleak.  By understanding risk, exercising patience, and adhering to a long-term investment strategy, it is possible to produce attractive returns while maintaining an acceptable level of risk.

 

 

Establish a strategy and stick to it. 

 

Most investors, even those with a considerable amount of assets or experience, don’t have a well-defined investment strategy.  Or if they do, it lasts until the next new investment trend.  It even happens with professionals.  In the last bull market, many money managers and mutual funds abandoned their strategies when performance turned against them, only to suffer whiplash when the market once again reversed.

 

Vista recognizes that each investor has unique objectives and risk tolerance.  These must be understood and defined.  Each investment has different return and risk characteristics.  By combining various investments in a portfolio, it is usually possible to achieve long-term return objectives within a client’s risk parameters.  Vista utilizes an Investment Policy to document these considerations and establish the client’s long-term strategy.

 

The Investment Policy will specify a target asset allocation by quantifying the percentage that may be invested in each major asset class – cash, fixed income and stocks.  It will provide guidelines concerning investment quality and diversification and it will describe benchmarks for evaluating performance. 

 

 

Seek value… Diversify… Rebalance.

 

Vista’s equity investment process relies heavily on the analysis of fundamental data.  Utilizing computer software, thousands of companies are screened and ranked.  In-depth analysis is performed on those that score the highest.  Investments are made in companies that appear to be undervalued in relation to their earnings, cash flows and growth rates.  In addition, other factors such as management strength, financial condition, profitability, and consistency of performance are considered.  Equity investing requires patience, as some investments will not work out as anticipated, and others will need to be held for a considerable length of time for them to be successful. When long-term fundamentals negatively change, or a price target is reached, the investment is sold.

 

A properly diversified portfolio will attempt to maximize long-term return potential within a given level of risk.  There are many types of risk – company risk, market risk, sector risk, geographic risk, economic risk, interest rate risk, etc.  Diversification means limiting exposure to any one type of risk.  A portfolio can be diversified among asset classes (stocks, bonds and cash) and within asset classes.  Within the equity portion of a portfolio, Vista seeks exposure to all major industry sectors, growth and value stocks, large and small companies and international markets.  Using the industry jargon, this is defined as a core equity or multi-cap style.

 

Rebalancing a portfolio on a regular basis imposes a discipline that usually results in buying low and selling high.   For example, if the equity portion of the portfolio has fallen below its target level due to a market correction, rebalancing forces the portfolio manager to sell fixed income securities and use the proceeds to buy stocks when they are cheap.  Similarly, if an individual stock position doubles in value, cutting it back to a normal exposure reduces risk, and often forces the sale of an overvalued security.

 

Vista does not believe that it or any other investment firm can consistently add value by market timing.   For this reason, the security selection process is driven by a fundamental analysis of each investment and adherence to the client’s Investment Policy, which incorporates the concepts of diversification and rebalancing.