We never want to be a “Black Box” when it comes to our investment strategies and philosophies. In fact, we want our clients to be empowered with the knowledge of how their assets are being deployed, and have the comfort of knowing that there are downside protection strategies in place while achieving the growth necessary to meet their long-term financial goals. You may have heard about our use of the Three Dials in our asset allocation process (for more information on the dials, please check out some of the earlier blog posts). Below, you will find answers to commonly asked questions about the Three Dials, their purpose, and how their implementation filters through our entire investment and financial planning process.
What are the Three Dials and what purpose to they serve?
The Three Dials form the core of our firm’s proprietary asset allocation strategy. They provide an unbiased, data-driven look at three crucial aspects of equity markets, allowing us to increase our risk exposure when investment opportunities are attractive, while providing a protective quantitative overlay during macro trend changes in market direction.
What are each of the Dials and how do they work together?
Our Valuation dial tells us to increase equity exposure when stocks are cheap and decrease exposure when stocks are expensive. Our Economic Fundamentals dial
tells us to increase equity exposure when underlying economic growth appears strong and decrease exposure when growth is weak. Our Momentum dial tells us to increase equity exposure when buying appetite is healthy and decrease exposure when stocks have fallen out of favor. Together, they provide a cohesive picture how attractive or unattractive equity investments are at any given time.
Is the Three Dials methodology unique to Archetype?
Yes. Our team researched dozens of indicators in isolation and combination, with various portfolio construction methodologies, before settling on the Three Dials as our tactical method of offering upside to equity growth while providing a protective overlay against downside exposure.
When is the “protective overlay” provided by the Three Dials deployed?
It is put on the day we invest, so our clients go to bed at night knowing that there is protection in the case of a drawdown.
How do conclusions made by the Three Dials manifest themselves in my individual client portfolio?
Both at the onset of a client relationship and on a regular ongoing basis, we work with each client or family to determine their individual investment goals, risk tolerance, and unique financial circumstances. From there, we build a customized investment strategy with target risk bands that are driven by our Three Dials and allocate within the portfolio accordingly.
How do you determine allocations within the broader asset classes of equities (i.e., domestic versus international) and fixed income (i.e., credit quality and duration)?
Once we arrive at our target allocation to equities, we fill out the rest of our portfolio with fixed income, cash and real assets. We use a combination of our proprietary indicators, alongside the macro outlook from our team and external partners, to derive our sub-allocations and build a diversified portfolio.
Once you make a big picture asset allocation decision, how do you decide on individual security selection?
With the goal of achieving broad diversification and limiting our underlying costs, we typically allocate to a number of low-cost, liquid Exchange Traded Funds (ETFs). These ETFs typically track an index within the asset class to which we are looking to gain exposure.
Will you include mutual funds or individual stocks/bonds in your portfolios?
In certain cases, where costs are comparable or liquidity within index ETFs is unfavorable, we will allocate to mutual funds over ETFs within a specific sector. We seek to avoid single stock/bond purchases due to the idiosyncratic risk of individual security selection. We prefer to limit our downside by diversifying away from individual security risks through index ETFs or mutual funds.
Do sustainability factors (i.e. environmental, social & governance or faith-based) enter into your investment process?
We have a dedicated team member in charge of researching the latest trends and investment products in the sustainable investing space. For those clients to whom sustainable or ESG investing is important, we have investment portfolios completely devoted to sustainable investment products and solutions.
How often to you make changes to the portfolios?
Though we have the ability to be nimble and make a portfolio adjustment any time it is warranted, we try not to alter our portfolios more than once per month. On average, we expect our Three Dials methodology to suggest an allocation adjustment once every three to six months, and we aim to rebalance client portfolios annually at a minimum.
Please reach out to us if you have questions that were not addressed above, and we will be sure to get you an answer.
Ethan Pollard serves as Vice President of Portfolio Management at Archetype Wealth Partners. He handles many of the research, trading and financial planning responsibilities at Archetype Wealth Partners, including the development of our economic and portfolio risk sensitivity models. Originally from Houston, Ethan currently resides in Chapel Hill, North Carolina with his wife Katie. Archetype exists to help families thrive across generations.
Our intent in providing this material is purely for informational purposes, as of the date hereof, and may be subject to change without notice. This article does not intend to constitute accounting, legal, tax, or other professional advice. Visitors and readers should not act upon the content or information found here without first seeking appropriate advice from a trusted accountant, financial planner, lawyer or other professional.