Emerald’s Education Series: Building a Stock Portfolio

Our fundamental goal at Emerald Advisors is to help you make informed investment decisions that align with your financial goals, risk tolerance, and time horizon. Once we understand these key foundational pillars, we then build you an optimized stock portfolio as an integral part of your overall wealth strategy. This month we explain how Emerald Advisors builds the stock portfolio, looking first at several steps in our process, then explaining a few more details on methodology, as well as some special considerations and alternative investments that may apply to you.

Here’s a general overview of the Emerald Advisors Portfolio Process:

1. We Understand Your Financial Goals: It all begins with our relationship. Built on mutual trust and detailed discussion with your direct input as the basis, we form a comprehensive understanding of your financial objectives. This includes factors such as retirement planning, saving for education, purchasing a home, or any other specific goals – large or small, short or long term.
2. We Learn Your Risk Tolerance: Through survey and discussion, we establish your comfort level for accepting investment risk, which helps determine the appropriate asset allocation and level of risk for the portfolio.
3. “Dialing In” Your Asset Allocation: Based on those goals and risk tolerance, we determine an optimal asset allocation across different asset classes, such as stocks, bonds, cash, and alternative investments.
4. We Choose Investment Opportunities: Once the asset allocation is determined, our research finds the best opportunities within the chosen asset classes. This involves analyzing various stocks and considering factors like company financials, industry trends, valuation metrics, and other relevant information.
5. Conduct Due Diligence: We “deep dive” potential investments to assess their suitability for the portfolio. This includes reviewing financial statements, conducting fundamental analysis, evaluating management quality, assessing competitive advantages, and considering any potential risks. Our goal here is to assure optimized risk across the portfolio based on your comfort level – looking for the “best in class” to maximize investment potential.
6. Provide a Diversified Portfolio: At Emerald, diversification is a crucial aspect of portfolio construction. We spread your investment across different companies, sectors, and geographies to reduce the impact of any single investment’s performance on the overall portfolio. This helps manage risk and enhance returns.
7. Build your Portfolio: Using insight gained from our research and due diligence, we select specific stocks that align with your investment objectives and risk tolerance. Next, we select the appropriate weightings for each stock within the portfolio based on our analysis and your resulting asset allocation strategy.
8. Maintain your Portfolio – Monitoring, and Rebalancing: Once your portfolio is “in play,” we regularly monitor its performance and adjust as needed, always keeping you fully informed. This involves keeping track of individual stock performance, assessing market conditions, and rebalancing the portfolio periodically to maintain the desired asset allocation. And, because your risk tolerance and resiliency can change over time, we continue to ensure you remain comfortable with your entire portfolio.
9. We Stay in Touch: Throughout the investment process, Emerald Advisors will openly communicate in the way you prefer. Our website provides you with real-time access to your portfolio’s performance. And we will always provide regular updates, discuss any changes or adjustments made, and address any questions or concerns you may have as your portfolio evolves and delivers the financial freedom you seek.

Here’s more detail on Emerald Advisors Portfolio Construction Methodology across various asset classes:

To build your portfolio, we choose a diverse array of investments optimized across a full range of equity (stock), fixed income (bond), and cash or money market opportunities. Each of these investment categories is refined as follows based on your requirements and input:

Equity Investments

• S. Equities – often the predominant portion of equity holdings in a given portfolio comprising one-third to one-half of equity holdings
• Dividend & Technology Stocks – Emerald portfolios have a bias toward dividend-paying stocks, typically forming one-third of the equity portion of your portfolio
• International Stocks – to gain the advantage offered by global markets, one-quarter of your portfolio may include stocks from developed countries, and some opportunities from emerging markets as well. The inherently higher risk in emerging markets is offset by benchmarking the very best portfolio models such as BlackRock or Vanguard
• Small Cap – small capitalization stocks may comprise a small portion of your portfolio. Given the riskier nature of these investments, they may not be included in more conservative portfolios, and are often held via Exchange Traded Funds (ETFs) or Mutual Funds
• Stock Themes – a small portion of your portfolio may include focused trading on emerging themes such as clean energy, artificial intelligence, cyber security, or cloud computing. This offers another way for your portfolio to gain from these and other rapidly developing areas

Fixed Income Investments

• S. Multi-Sector Fixed Income – for around one-third to one-half of the bond holdings in your portfolio, we choose actively managed bond funds for greater flexibility to opportunistically shift to the most attractive areas of the market in rapidly changing areas like mortgage-backed securities, asset-backed securities, high yield funds, bank loans or corporate bonds
• Municipal Bonds/Intermediate Core-Plus – Depending on the tax status of your portfolio, we place up to one-third to one-half of fixed-income holdings in municipal bonds for tax advantages, and in non-taxable accounts, we focus on treasury and corporate bonds
• International Fixed Income – forming around one-tenth of most portfolios, ETF or Mutual Fund holdings provide an appropriate exposure level
• Short Duration – some of these lowest-risk fixed-income opportunities may support portfolios with significant fixed-income holdings. Where appropriate, this asset class may comprise 15% of fixed-income exposure

Cash Investments

• Cash – under normal market conditions your portfolio will be around 2% cash. When appropriate in more volatile market conditions, cash holdings may increase up to 6%
• Money Market Funds/Cash Alternatives – depending on the specific dollar amounts of cash in each portfolio, we move some balances to money market funds of cash alternatives such as short-duration mutual funds or ETFs to preserve liquidity while still gaining returns

Alternative Investments (appropriate for certain portfolios on a case basis)

• Market Linked Notes – in some portfolios, limited investment in these opportunities can protect the downside, provide current income, or provide a targeted opportunity
• Real Estate – typically expressed in real estate-focused ETFs or, in some cases, private Real Estate Investment Trusts (REITs) are also possible
• Traditional Alternatives (Private Equity/Private Credit) – where advisable on an individual basis, your portfolio may include opportunities in longer liquidity private investment

As you can see in the detail above, Emerald Advisors build portfolios that provide you access to the full spectrum of investments you need to achieve the goals we’ve established together. The “Emerald Way” comprehensive approach to portfolio management is another key aspect of our relationship. As your advisors, it’s our sincere hope that our continuous effort and deep understanding of your financial picture allow us to relieve you of the significant stress that changing market conditions and economic uncertainty can cause, enabling you to focus instead on your family and goals for the future and provide you a little bit more of that most precious commodity – time.

We stand ready to discuss any of this in more detail or to answer any specific questions you may have.