Investment terminology can be a major barrier to understanding your portfolio. This guide breaks down the core concepts ModernAdvisor uses to manage your wealth, from the specific assets we choose to the overarching strategy of your plan.
Security Selection: Choosing the Ingredients
Security selection is the process of deciding which specific stocks or bonds belong in a fund. There are two primary ways to do this:
Active Selection: Portfolio managers and analysts research individual companies to decide what to buy and sell. The goal is often to "beat the market," but this requires high human intervention and results in higher fees.
Passive Selection: Also known as Indexing, this approach uses pre-determined rules (index methodology) to decide what to buy. Because it requires less daily research and human intervention, passive funds typically have much lower fees.
Asset Class: The Building Blocks
An asset class is a group of investments that share similar risks, returns, and reactions to the economy. We group these into four main categories:
Equities (Stocks): Ownership in a company. These can be categorized by geography (e.g., Canada vs. US), size (Large-cap vs. Small-cap), or industry.
Fixed Income (Bonds): Loans to governments or corporations. These are categorized by the borrower's (also called the issuer) creditworthiness and the time until the loan is repaid (maturity).
Cash & Equivalents: Highly liquid, low-risk assets like T-Bills or high-interest savings.
Alternatives: Assets that don't fit the above, such as Real Estate (REITs), infrastructure, or commodities.
Asset Allocation: The Recipe
Asset allocation is the process of deciding the percentage of your portfolio dedicated to each asset class and geography. It is arguably the most important factor in determining your long-term risk and return.
Strategic Asset Allocation
This is your long-term foundation. It is based on your specific time horizon and risk appetite. Strategic allocation ignores short-term market "noise" and stays focused on your long-term goals.
Tactical Asset Allocation
This is a flexible overlay. While the strategic allocation is the starting point, a tactical strategy allows an investment team to temporarily increase or decrease exposure to certain assets based on current economic trends. This results in more frequent changes to the portfolio to capitalize on market opportunities or mitigate risks.