Investing is a house

by Martin Roche, Russell Investments

If you’re like me, looking to build a house on your own, then the following should come as no surprise: In order to construct a new home, I first off have to know my strengths—and areas where I need to rely on experts and specialists instead. For instance, I know what I want my home to look like: two floors, an open kitchen, north-facing windows and an oversized deck. But I don’t really know how to go about building it to make this desire a reality. Sure, it’s possible that I might be able to cobble together something livable over many years and many attempts, but the electrical would be shoddy (read: dangerous), the coveted second floor wouldn’t exist and the roof might leak. All things considered, it wouldn’t provide my family with the outcome I have in mind—and so, I’d turn to the experts.

The same holds true when it comes to investing. You might know what you want your portfolio to look like—and what outcomes you want to achieve—but how can your portfolio be designed in a way that helps make these outcomes a reality?

At Russell Investments, we believe that, similar to how you’d leave the construction of your home to the experts, the build of your portfolio should likewise be managed by a team of specialists—each of whom plays a vital role in helping you best achieve your goals.

Let’s walk through what we see as key roles needed to fill out this team of experts.

Advisor = architect of investment planning

First and foremost is the advisor. We believe it’s best when clients work closely with an advisor who serves as the principal architect to their investment plans. As an advisor, we believe you should first assess the needs and goals of your clients and explain to them the best way to help achieve their plans within the necessary timeline. Then, gathering these needs together, we think the next step is to work with an asset manager—in housing speak, a general contractor and engineer.

General contractor and engineer

It goes without saying that not everyone is an expert in every asset class. This is why we think it works best for advisors to turn to a third-party asset manager at this stage. We believe an asset management shop can first and foremost identify the experts and specialists—independent money managers from across the globe with the potential to outperform—necessary for the build of the portfolio. Think general contractor. Secondly, we believe that the asset manager can bring all these pieces together to help design a portfolio that best aligns with the desired client outcome. Think engineer.

Expertise is key

We see one of the responsibilities of the general contractor role as vetting each manager and asking them to do a very specific job for each portfolio. It may also be helpful, in our view, to pair together managers who might work in the same space—but whose strategies complement each other—to help enhance the potential outcome. In addition, we believe it’s crucial to make sure that the specialists hired do strictly the work they’re brought in to do—in similar fashion to how a house comes together, piece by piece. Just as you wouldn’t want an electrician doing the plumbing, even if he/she insists they can, you wouldn’t want a U.S. large-cap equity manager doing fixed income selection. Ultimately, when it comes to portfolio design and implementation, we believe it’s mission-critical to find the right person for the job where her or his expertise is best utilized.

Finally, any good general contractor will make sure that a project stays on track. We see the role of the asset manager here as the same. We believe that in order to help ensure that the build of an investment portfolio stays on course, it’s a good idea to routinely review both risk and performance, in order to help your clients reach their desired outcomes.

Ongoing review and maintenance is essential

Once a house is built, and things are in place, you’ll want to keep it in tip-top shape. Of course, in order to do this, routine maintenance is a must: the grass will need to be cut, air filters changed, gutters cleaned, and should a hail storm come, the roof fixed. In a similar vein, just because you’ve selected an investment strategy, it doesn’t mean that the work is done. We believe that if you want to help your clients to reach their goals, review and maintenance is essential. Complacency, in our view, has no place in portfolio management. We believe that an asset manager should constantly monitor personnel, performance, and investment styles of the money managers in order to help keep investments on target.

Of course, sometimes the goal posts move. The outcome desired a year ago may no longer be suitable. We get it. After all, life is constantly changing. Continuing with our housing analogy—maybe you welcome a baby into the family and need another room added on to your home. Or, aging parents come to live with you. Whatever the reason, the house as originally built is no longer suitable. In similar fashion, your client’s portfolio needs are bound to change—and as the advisor/architect, we believe it’s imperative to adapt a portfolio to meet any new objectives. This may mean taking into consideration growth and wealth preservation through tax efficiency, or retirement income needs, for instance.

The bottom line

The makeup of housing can vary far and wide, but your home is best when it’s specific to you. Likewise, each client is different and has his or her own custom needs to meet. This is why we believe that taking each client’s investment plan and tailoring it to what matters most—client-specific outcomes—is ultimately a best-practices approach.

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Disclosures

These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.

Investing involves risk and principal loss is possible.

Past performance does not guarantee future performance.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.

The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.  The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.

Russell Investments’ ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments’ management.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the “FTSE RUSSELL” brand.

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