Implementation

Today’s marketplace offers investors a seemingly endless array of investment products, from traditional retail mutual funds to annuities to hedge funds. Unfortunately, many of these products seem to best serve the interests of the investment provider rather than the individual investor.

When choosing investments at Capital Directions, our primary focus is on finding investments that will provide accurate asset-class exposure at the lowest cost and with the greatest tax efficiency. This is a crucial goal in order to implement the tenets of Modern Portfolio Theory correctly.

With this is mind, we use three primary types of investments in our clients’ portfolios:

1. Institutional, asset-class mutual funds
2. Exchange traded funds (ETFs)
3. Individual bonds

Institutional, asset-class funds are low-cost, style-specific investments designed to capture the risk and return characteristics of a specific market segment. These funds track their targeted asset class with great precision and with much lower cost than most retail mutual funds. Such funds are available only to large institutional investors and a limited number of independent Registered Investment Advisors, including Capital Directions.

Exchange traded funds (ETFs) were first developed in the 1990s and typically are used to replicate a common benchmark, such as the S&P 500. ETFs are extremely cost- and tax-efficient, historically distributing almost no capital gains. Although there are now hundreds of ETFs, we limit our focus to only a few offerings that track established benchmarks and are from well-respected institutional investors such as Barclays and State Street.

Individual corporate and municipal bonds help offset the risk of investing in the equity markets. Additionally, individual bonds also offer a fixed stream of income, making a portfolio’s cash flows more predictable. Under certain conditions, a bond mutual fund may be appropriate as such funds offer a highly liquid and cost-effective way to invest in the fixed-income asset class.

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