The general investment philosophy employed at Burk, Hall & Co. is partially founded on the principles of Modern Portfolio Theory (MPT). This theory was established by UCLA economics professor Dr. Harry Markowitz. He was later awarded the Nobel Memorial Prize in Economic Sciences for this theory. Markowitz's theory examines capital markets from a standpoint of statistical probability using many years of market data from which to draw conclusions. The core thesis of MPT is that different segments of the stock and bond market perform at different rates at different times. It concludes that in effort to reduce risk, it is critical that an investment portfolio be diversified among different asset classes. The term for this process is asset allocation.
While it is true that risk to a portfolio may be reduced by utilizing asset allocation, at Burk, Hall & Co. we believe that this is only the first step in seeking to reduce risk and achieve potential portfolio returns. As stated above, the core of Modern Portfolio Theory is the principle that different asset classes perform at different rates at different times depending on economic and market conditions. As such, we work hard to employ a level of tactical asset management that allows us to overweight the asset classes and sectors that are outperforming, while underweighting those that are underperforming.
Our decision to overweight or underweight an investment in a client's portfolio is by a technical analysis derived from measurements of relative strength. Point and Figure Charting was originally developed by Charles Dow in the 1800's. For more than thirty years Dorsey, Wright and Associates have advanced Point and Figure Charting by employing computers and technology to refine this technical analysis. Dorsey Wright uses this information to measure the Relative Strength of any market, asset class, sector, or stock against another. To give you some perspective, ten years ago our practice was charting no more than thirty stocks by hand each and every day. With today's technology, we can review over 100 charts daily. It is a lot of work, but we firmly believe that proper asset management is possible by dedicating ourselves to a discipline of sound technical analysis, good fundamental research, and proper asset allocation.
Most financial advisors and money managers, if they are employing principles of MPT, will rebalance a client's portfolio at set intervals of time with regard to the strength or weakness of the investment style. With this approach, you take from the strong and give to the weak upon a theory that you cannot time the market and at some point in the future, the weak will become the strong again. In contrast, when utilizing technical analysis and measurements of relative strength*, we will rebalance when we see a reason to rebalance. In this manner, we will stay in strong asset classes and sectors until they exhibit weakness, a peer asserts itself as an outperformer or the portfolio no longer aligns with our client's risk tolerance and investment objective. This approach recognizes that some asset classes and sectors will remain strong and outperform their peers for an extended period of time - sometimes many consecutive years. In short, while we believe that risk in a portfolio will be reduced by employing diversification, our strategy seeks to overweight your assets in sectors that are outperforming. With the technology and technical analysis available to us today, we believe this goal is achievable.
*Relative Strength is a measure of price trends that indicates how a stock is performing relative to other stocks in its industry.
Disclaimer - All investing involves risk including loss of principal. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future. Dorsey, Wright & Associates developed the indicators described in this report. They have been prepared without regard to any particular investor's investment objectives, financial situation and needs. Accordingly, investors should not act on any recommendation (express or implied) or information in this report without obtaining specific advice from their financial advisors and should not rely on information herein as the primary basis for their investment decisions. Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market. Advisory accounts are not designed for excessively traded or inactive accounts, and may not be suitable for all investors. During periods of lower trading activity, your costs might be lower if our compensation was based on commissions. Please carefully review the Wells Fargo Advisors advisory disclosure document for a full description of our services, including fees and expenses. The minimum account size for Advisory Programs varies.