AAFMAA’s investment philosophy is doing what is right for our members. We base all of our decisions on a patient, long-term perspective. We believe that the single most important determinant of investment success is a proper asset allocation that matches your long-term investment goals; timeframe, and ability to tolerate short-term market volatility.
Investment success based upon a proper asset allocation is supported by numerous historical studies. One of the most widely referenced studies (“Determinants of Portfolio Performance” by Gary Brinson, Randolph Hood and Gilbert Beebower) showed that 90% – 95% of the returns generated by a large sampling of pension funds over a certain 10-year period were due to their asset allocation rather security selection. In other words, an investor’s exposure to a certain asset class was more important than the specific securities within that class.
While we are firm believers in the power of a long-term, focused, and properly allocated portfolio, we are also keenly aware of the need to mitigate risk whenever possible. As such, diversification strategies are key to our investment process. By dividing a portfolio carefully among selected asset classes, an investor has the ability to maximize potential return at an acceptable level of risk.
We believe that clearly defined investment objectives, financial goals, investment time horizon, and risk tolerance reduces the impact of emotion (fear) on your potential return.
Our investment process uses a combination of mutual funds, as well as individual stocks and bonds when constructing your portfolio. We use actively managed mutual funds (where the managers seek to outperform an index through investment selection) whenever we feel that the management of that fund can deliver better risk adjusted returns, net of taxes and fees, than a passive index approach could. When we cannot find an appropriate active fund, we will use passive index funds to obtain our desired asset class exposure.
Prior to any mutual fund, stock or bond being purchased for a member’s portfolio, we conduct a rigorous review and assessment process. Once purchased, all investments are monitored continuously and adjusted as needed.
We believe systematic rebalancing of assets is essential to maintaining the consistency of an investment account’s returns and risk profile. We do not use a periodic rebalancing method where portfolios are rebalanced at specific times of the year. Instead, we use a percentage-based methodology where portfolios are rebalanced whenever set parameters are reached. When an asset classes exceeds a specified percentage of the portfolio we pare back that class and move it into an under-represented class.