Implementing Our Investment Philosophy
 Our approach to solving the investment problem is based on the ideas of Modern Portfolio Theory and the principle that in the long-run markets work. The essence of our approach can be described by the accompanying chart that includes a straight line between a risk-free asset and a risky portfolio.
We seek to develop the best portfolio of risky assets that, when combined with a so-called risk-free asset, allows any investor to find the desired place along the straight line between the risk-free asset and the risky portfolio. While the place on this line is unique to each investor; the risk-free asset and optimal risky portfolio is not.
The Risk-Free Asset
While acknowledging that there can be both interest rate risk and credit risk, we use a well-diversified portfolio of fixed-income securities as a surrogate for the risk-free asset. We may use three separate strategies to construct this portfolio:
- A fund/ETF designed to replicate the characteristics of the domestic bond market
- A combination of a U.S. Treasury securities and high-yield bond portfolio, and
- A portfolio of U.S. Treasury securities only.
In strategies 1 and 2 we bear both interest rate risk and credit risk; in strategy 3 we bear only interest rate risk. In all three strategies we seek to take a market level of interest rate risk and credit risk.
The Risky Portfolio
We construct the risky portfolio in a two-step process. The first step is to find the optimal combination of just four separate asset classes:
- 90-day T-bills
- Domestic large cap stocks
- Domestic small cap stocks
- International equities
 We determine this combination by using the historical results of several well-known benchmarks that are used as proxies for these asset classes to produce the highest average return subject to the historical variation of the S&P 500.
The second step is to look within each broad equity asset class for markets/market segments that improve the risk/expected return characteristics of that broad asset class. We consider real estate markets, value segments and emerging markets. Our two-step process results in a risky portfolio that is allocated as shown in the chart to the right.
Some Recent Results
The intent of the following table is to provide some indication of what can reasonably be expected from implementing our philosophy. This data is presented to show the long-term relationship between returns and investment risk. It is not intended to present performance results experienced by clients of RJR Associates. Also, the reader must recognize that future investments would be made under different economic conditions. It should not be assumed that you would experience returns, if any, comparable to those shown below. The information given is historic and ought not be taken as any indication of future investment results (returns for periods ending December 31, 2009).
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Reflects the results before fees of various benchmarks allocated according to various levels of risk based on allocations to fixed-income markets based on Barclays Government/Credit Index |
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Reflects the results of portfolios allocated among several broad equity and fixed income markets according to RJR Associates model portfolios but substituting the results of well-diversified commitments to additional market segments designed to provide incremental diversification beyond the widely followed market benchmark. The fixed income market reflects the results of the 5-year Treasury Index. |
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