At Faith-Based Investor, we have found that by combining strong investment opportunities with a disciplined use of moral and financial criteria, we can often help our clients meet or exceed their objectives. In order to help you with your portfolio, I wanted to share some of our internal processes that may help you make some wiser decisions when it comes to investing.
Here is how we build portfolios using the latest asset allocation and diversification principles.
Step one: first we start with our moral criteria
We selectively try to find companies that meet our standards:
- Feeding the poor and helping the underprivileged
- Building stronger communities
- Promoting traditional values
- Finding cures for diseases
- Operating in an ethical and moral manner
- Making a difference in society
Next we determine which companies we wish to avoid:
- Embryonic stem cell research
- Homosexual activism
- Anti-family entertainment
- Poor human rights
Step two: next we determine which investments meet our financial criteria
Our investment philosophy is quite simple: Find tomorrow’s treasures today! That is easier said than done! However, with painstaking research, dedication, and perseverance, it is possible to find high-quality, undiscovered smaller companies that may one day grow into larger, more recognized and profitable companies. We also try to find larger, well respected companies that we feel are undervalued in the marketplace.
Some of the key qualities we look for include great products and services in an expanding industry, strong managers with significant insider ownership, strong balance sheets with little or no debt and plenty of cash, commitment to returning value to shareholders in ways such as paying a dividend or repurchasing shares, strong cash flows, increasing revenues and earnings, improving margins, and extremely attractive valuations.
Once we find what we call a “dream buy,” it’s game over. Buy the shares, hold ’em for the long haul (three-plus years), and sit back and wait until the big boys on Wall Street are willing to pay a hefty premium for the shares. We also want to balance risk in the portfolio so we look at stocks, bonds, and alternative investments.
Step three: determine your proper mix
We spend a lot of time getting to know our clients. We want to know their dreams and goals, how long they can tie their money up for, how much risk they are willing to take, what they have for emergency funds, what does their tax situation look like, and a whole host of other questions. That helps us determine how much each investor should have in each of the four major asset classes (stocks, bonds, cash, and alternative investments).
Step four: diversifying your risks
This is one of the most important steps in the process. We break our investments into eight categories and have created eight separate folios. We use FolioFn to manage client accounts. Here is how we use diversification:
1.) Large Cap 25 Index: we have hand selected 25 larger companies that we feel are best representative of the S&P 500 Large Cap Index.
2.) Mid Cap 25 Index: we have hand selected 25 mid sized companies that we feel are best representative of the S&P 400 Mid Cap index.
3.) Small Cap 25 index: we have hand selected 25 smaller companies that we feel are best representative of the S&P 600 Small Cap Index.
4.) Foreign 25 Index: we have hand selected 25 foreign companies that we feel are best representative of the EAFE Index.
5.) BRIC 25 Index: we have hand selected 25 companies in emerging markets (Brazil, Russia, India, and China) that we feel are best representative of the MSCI BRIC Index.
6.) Fixed Income Index: we have hand selected 10 ETFs that we feel are best representative of the fixed income markets.
7.) Alternative Investment Index: we have hand selected 7 ETFs that we feel are best representative of the alternative investment markets (commodities such as gold, silver, agriculture, and oil to name a few).
8.) REIT Index: we have hand selected 25 real estate companies that we feel are best representative of the Real Estate Investment Trust (REIT) market.
Step five:Building your strategy
We now combine the 8 folios in a way consistent with our client’s goals and objectives. We have five different strategies for our clients: from those seeking capital preservative all the way to the most aggressive investor. By using the eight folios in a portfolio, we diversify the risk our clients take. By having some exposure to large, mid, small, international, and emerging market stocks are clients tend to see less volatility. By diversifying risk in the fixed income markets, our clients tend to see more consistent income, by adding in alternative investments and real estate, our clients also see additional diversification benefits.
Hopefully, by seeing how much work and effort goes into building a portfolio, you will be challenged to take a closer look at your own personal strategies. Do you or your advisor take this much care and go through this much effort? If not, why not? What areas do you need help? If I can help in any way, please let me know!