Implementing A Portfolio Diversification Strategy
Use of Active vs. Passive Management
Johnston Investment Counsel believes the use of low-cost index funds (or passive management) has a place in portfolio construction. We typically have larger index-fund allocations to investment styles where index funds have consistently outperformed active managers.The tax characteristics of different accounts will also impact the use of index funds vs. active managers.
We consider the effect a new manager may have on the existing portfolio and its abiltity to provide any diversification (risk control) benefits. We perform this analysis by evaluating several different portfolio characteristics, portfolio holdings, as well as the manager’s historical return pattern.
Taxes and Multiple Accounts
Some clients will have multiple accounts with different tax characteristics (such as an IRA, Roth IRA, trust, and a taxable account). To minimize the potential impact of taxes, Johnston Investment Counsel will allocate portfolio assets in as tax-efficient way as possible. For example, we could allocate higher turnover strategies to a tax deferred account while holding lower turnover strategies in a taxable account.