I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well.

- Alan Greenspan, Chairman of the Board of Governors of the Federal Reserve System (1987 - 2006)

As knowledge spreads, wealth spreads.

- Rutherford B. Hayes, 19th President of the United States (1877-1881)

Kalorama's mission is to help individuals achieve greater financial security and independence by providing independent advice with objectivity and integrity. Kalorama does this by always putting a client's desires and wishes first, as well as ensuring that they receive first-class quality service. We endeavor to provide an experience in which clients are comfortable and enjoy learning how to achieve greater financial security and independence. Kalorama's stakeholders believe that the community and society would be better served with a population that is both financially literate and secure.

Investment Philosophy

Wealth does not bring excellence, but that wealth comes from excellence.

- Plato, Greek philosopher

Kalorama's investment philosophy embraces leading-edge investment strategies based upon sound financial and economic principles that emphasize low costs and tax efficiency. Portfolios are constructed using a disciplined investment advisory process to ensure that goals and objectives, risk tolerance, and asset allocation are appropriately considered. Through a rigorous quantitative and qualitative analysis used to select investments, we construct globally-diversified, multiple-asset-class portfolios. Investments include low-cost, passively- and actively-managed mutual funds and exchange-traded funds (ETFs). Kalorama's goal is to maximize after-tax total return (capital gain plus income) within an investor's risk tolerance and time horizon.

Kalorama's investment philosophy includes the following nine principles:

  1. Portfolio asset allocation and diversification
  2. Policy Investing — an Investment Policy Statement (IPS) will provide a roadmap to achieving your goals
  3. Portfolio Rebalancing will force the investor to buy low and sell high
  4. Total Portfolio Approach — an investor must consider all assets as one portfolio
  5. Passive and Active Portfolio Construction
  6. Minimize investment costs for superior portfolio returns — use no-load mutual funds or exchange-traded funds with low operating expenses and portfolio turnover
  7. Minimize taxes for higher after-tax returns — asset location is an important consideration in what you are able to keep after taxes
  8. Fee-only compensation, no commissions — fee-only is the sole method of compensation that aligns the interests of the advisor and the client
  9. Transparency — clients should know how their money is invested and why the investments were chosen

1. Portfolio Asset Allocation and Diversification

Don't Put All Your Eggs In One Basket

Although it may seem clichéd, the "eggs in one basket" analogy is the essence of asset allocation. Asset allocation is the distribution of investment dollars among various asset classes, such as stocks, bonds, and cash, and the diversification of investments within each of those asset classes.

The concept of asset allocation and diversification has been around for several thousand years. The Talmud states:

Let every man [and woman] divide his [or her] money into three parts, and invest a third in land, a third in business, and a third let him [or her] keep in reserve.

A modern-day version might be: "Let every investor diversify their assets so that the portfolio allocation is a third in real estate investments, a third in common stocks, and the last third in cash and bonds."

More recent research demonstrates that the selection of asset classes and the portfolio percentage allocated to each is the most important element in developing portfolio strategy. Further, it suggests that attempting to time the market is a fool's game. It is impossible to consistently predict when to get in and out of the market, which would be based on a guess of when the market is hitting new highs and lows. These studies have shown that time in the market is considerably more important than timing the market. Moreover, it is difficult to consistently select the individual securities or investment asset classes that will be the superior performers. By investing in a diversified portfolio, an investor is ensured of obtaining the returns from the top-performing asset classes. This rotation of leadership in the portfolio from one asset class to another enhances the long-term, risk-adjusted performance of the portfolio.

Kalorama's investment philosophy embraces the proven principle that asset allocation is the primary determinant of portfolio performance by strategically constructing globally-diversified, multiple-asset-class portfolios. This may include domestic and international equities (such as small-cap, large-cap, value and growth equities); treasury, corporate, and municipal fixed-income securities; real estate; and other tangible assets. We strongly believe that a globally-diversified portfolio containing many asset classes with different characteristics of return, risk, and correlations, will decrease the risk of your portfolio and provide the best opportunity for you to meet your long-term investment objectives.

2. Policy Investing — Your Investment Roadmap

Policy investing emphasizes financial goal setting, risk reduction, and portfolio diversification. Asset allocation is the key tool for implementing investment policy in a portfolio. An investor's financial goals, time horizon, risk tolerance, and funds available for investment are documented in a plan, and then a strategic asset allocation is developed to construct a diversified portfolio that is allocated among many asset classes. The classes are chosen based upon their historical risk and return characteristics, as well as their expected correlation (how they perform relative to one another). The percentage invested in each asset class is based upon the investor's goals, time horizon, and risk tolerance.

Policy investing assumes that the asset allocation, and not security selection or market timing, will be the most significant contributor to total portfolio return.

Kalorama's investment advisory clients are provided an Investment Policy Statement (IPS) that describes the investor's goals, objectives and constraints, risk tolerance, asset allocation strategy, performance measurement criteria, as well as any special considerations in the management of the portfolio. An IPS provides a description of how the portfolio should be managed and helps to avoid the pitfalls of "emotional" investing by keeping investors committed to a disciplined, long-term investment strategy as markets rise and fall. The IPS also helps to ensure that the portfolio remains within the investor's stated risk tolerance. This requires that the asset classes in the portfolio remain within a target percentage range. Portfolios are periodically rebalanced to realign the asset allocation with the original investment policy.

3. Portfolio Rebalancing Forces the "Buy Low, Sell High" Paradigm

Of course you have heard this adage before, but how can buying low and selling high be consistently achieved? The answer is periodic rebalancing of the portfolio to maintain the asset allocation strategy that is consistent with the risk tolerance documented in your Investment Policy Statement. This forces the investor to sell over-weighted or outperforming assets and use the funds to purchase under-weighted or underperforming assets. Having a rebalancing discipline also helps to reduce the emotional investment-decision-making that may create panic selling in a bear market and aggressive buying in a bull market.

4. Total Portfolio Approach

Most investors have assets in various types of accounts, including taxable, tax-deferred, and tax-free. Assets may also be in different types of retirement accounts, such as Individual Retirement Accounts (IRAs) and employer sponsored retirement plans (401(k) or profit sharing). When Kalorama develops your investment policy and asset allocation strategy, we take a Total Portfolio Approach by considering all of your investments. This ensures that all of your assets are invested according to the strategic asset allocation plan developed.

5. Passive and Active Portfolio Construction

In theory, securities markets quickly and accurately reflect all available information, thereby setting "fair" prices for both buyer and seller. Competition among market participants would make it virtually impossible for any investor to consistently earn a return greater than other investors. Conversely, inefficient markets would enable an astute investor to exploit security prices that do not accurately reflect all available information or do not respond quickly to new information.

An investor who believes that markets are efficient would invest in passively-managed index funds that replicate the performance of the market or an asset class. Alternatively, the investor who believes markets are inefficient would actively invest by trying to uncover mis-priced securities to buy and sell.

Research prepared by leading investment companies has shown that some publicly traded securities markets are efficient, but others are not (see link to article by The Vanguard Group, The Case for Indexing, March 2004, under News and Articles). In markets which are efficient, over long periods, passively-managed index funds outperform actively-managed funds. Conversely, in markets which are less efficient or inefficient, actively-managed funds in the long run outperform passively-managed index funds.

Index funds are portfolios consisting of groups of securities selected to mirror the performance of a benchmark representing an entire market or asset class, or a portion of a market or asset class. Some well-known indexes include the Standard & Poor's 500 Stock Index (representing large-cap domestic equities), the Russell 2000 Index (small-cap domestic equities), and the Morgan Stanley Capital International Europe, Australia, Far East Index (large-cap international, developed markets equities).

Index funds have been available to investors since 1976. A newer approach to passive investing is the use of exchange-traded funds (ETFs). While index mutual fund shares are available to purchase directly from the fund management company, as the name implies, ETFs trade on a stock exchange. ETFs are very efficient in capturing asset class exposures and are particularly useful in taxable accounts due to their tax efficiency.

The portfolio holdings of index funds and ETFs are generally changed only when the composition of the market or asset class changes, or when forced by shareholder liquidations. In contrast, the portfolio holdings of actively-managed funds are typically changed when the portfolio manager determines that a better investment is available.

Based upon the tax efficiency provided by index funds and ETFs, Kalorama's investment strategy is to use these vehicles to construct portfolios using both passive and active investments.  The taxable portion of the portfolio is primarily constructed using passively-managed index mutual funds or exchange-traded funds (ETFs), while the tax-deferred or tax-free parts of the portfolio are constructed using a combination of passive and actively-managed mutual funds.

6. Minimize Investment Costs — Loads, Expenses, and Turnover

Portfolio returns are also affected by various costs, including transaction fees and commissions, as well as operating expenses. Because Kalorama's investment advisory fees are based on a percentage of the assets managed, we have a strong incentive to minimize your transaction fees and operating expenses, and to maximize your portfolio value. Our fees can only rise when your portfolio increases.

There are two ways mutual funds are available to purchase: no-load or load. Load funds assess the investor a sales charge or load (commission) to purchase the fund shares, while no-load funds do not. Every dollar paid in sales charges or loads (commissions) is one less dollar you have working for you to achieve your goals. The opportunity cost can be significant.

Kalorama constructs its portfolios using top-performing no-load mutual funds, some of which may be subject to a modest transaction fee, as well as exchange-traded funds, which are also subject to a modest transaction fee. Kalorama does not receive compensation of any kind when you buy or sell investments — the transaction fees are paid to the brokerage firm that holds your assets.

The cost of managing a fund is also important. Studies have shown that average mutual fund performance is inversely related to fund operating expenses. That is, the lower the operating expenses, the higher the average annual total return. Kalorama focuses its selection of investments on mutual funds with low operating expenses.

Kalorama further minimizes investment costs by investing in passively-managed index funds or exchange-traded funds (ETFs). These funds typically have very low operating costs and management fees because turnover of fund investments is low and there is minimal effort expended on security selection.

The higher operating expenses associated with actively managed funds are generally from higher transaction fees related to the turnover of portfolio holdings resulting from an attempt to outperform the market. Higher management fees are a result of the research process necessary to select portfolio investments. Kalorama uses this knowledge by focusing certain portions of the portfolio on funds that have low expense ratios and low portfolio turnover.

7. Minimize Taxes — Asset Location and Opportunity Cost

Most individual investors need to consider a third dimension of investing beyond the two-dimensional risk and return framework. The third dimension is taxation. Every dollar paid in taxes is one less dollar you have working for you. The opportunity cost of paying the tax today must be weighed against future after-tax returns.

Kalorama strategically "locates" your investments in taxable, tax-deferred, or tax-free accounts to achieve the highest level of tax efficiency. The primary reason to "locate" investments in the correct account is to defer taxes as long as possible. For clients with both taxable and tax-advantaged accounts, tax-efficient investments are placed in taxable accounts and tax-inefficient investments are positioned in tax-advantaged accounts. To enhance after-tax returns in taxable accounts, Kalorama focuses on tax-efficient investments such as exchange-traded funds (ETFs) and/or mutual funds with low portfolio turnover.

8. Fee-Only Compensation, No Commissions

There are three methods in which financial planners/advisors can be compensated: (1) fee-only; (2) commission-based; and (3) fee-based. "Fee-only" planners/advisors are compensated solely by their clients and do not accept commissions or compensation of any kind from any other source. "Commission-based" planners/advisors are compensated by a third-party (generally a financial institution such as an insurance or investment company), who pays the planner/advisor commissions based upon the products purchased by a client in connection with the implementation of financial planning recommendations. "Fee-based" planners/advisors are compensated from a combination of fees and commissions.

Kalorama Wealth Strategies strongly believes that a fee-only structure is the sole method of compensation that aligns the interests of the advisor and the client. Both commission- and fee-based planners have an incentive to invest client money in products that pay the highest commissions. Kalorama adopted a fee-only structure to avoid the significant, inherent conflicts of interest that arise when an advisor is in a position to gain financially from the purchase of any investment or insurance product recommended to a client.

Kalorama is exclusively committed to helping clients achieve greater financial security and independence by providing independent and objective advice that has no potential of being conflicted by the payment of commissions or compensation of any kind from any other source other than our clients. With Kalorama's strict adherence to a fee-only structure, you are ensured that our allegiance is always with you — our client.

9. Transparency

Transparency in the financial markets means the full, accurate, and timely disclosure of information that provides the investor knowledge about a company or investment. Kalorama is committed to clear and easily understood processes that provide clients access to information so that knowledgeable decisions can be made.

Kalorama believes that clients and investors should not only know how their money is invested, but more importantly, why the investments were chosen. By embracing these nine investment philosophy principles, Kalorama takes the mystery out of how your money is invested and moves you closer to your goal of financial well-being.

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