We’ve Been Asked: Investment Strategies

April 02, 2024

1.   What is Sterling Financial Group’s process of picking an investment strategy?

  1. Clear mandate. To minimize the overlap of holdings, SFG focuses on strategies that are almost exclusively one style (e.g., large-cap U.S. Growth stocks).
  2. Performance. SFG focuses more heavily on long-term outperformance, such as annualized 3, 5, and 10-year returns, compared to a comparable index or percentile ranking among peers during these same periods, emphasizing consistency.
  3. Active Vs. Passive. As a firm, we feel that many markets are not as efficient as they could be, often described as “semi-efficient.” We look for active managers who consistently outperform their passive competitors by enough to justify their fees. If we can’t find an active manager in a particular space, we either use a passive or “smart beta” strategy instead that is inexpensive and closely follows its respective index.
  4. Fees. The investment management field is competitive, and fees are a definitive factor in our decision-making. We have managed a material decline in fees over the past five years, by choosing such investments as direct treasury bond securities, ETF’s or Institutional Class mutual funds.
  5. Taxes. Some investment strategies are more tax-efficient than others, which can be very important to some clients. Some strategies have a low average holdings turnover each year and some are within more tax-efficient wrappers like an ETF.
  6. Liquidity. Many alternative investment strategies are relatively illiquid; hedge funds or private equity funds are often illiquid for several years, and interval funds often will only accept redemption requests one day each quarter. In contrast, mutual funds and exchange traded funds (ETFs) offer daily liquidity, as do individual stocks and bonds, an important consideration for our clients.
  7. Independence. Our firm is an independent RIA without ties to a brokerage firm or investment strategy managers. We do not have any special sales incentives, commissions, or market-making activities that create conflicts of interest.

2.  How should I think about inflation when considering the targeted growth rate of invested funds?

  1. Inflation has been a headline topic in recent years, and it continues to be an important consideration for the Federal Reserve when considering a possible change to the overnight Fed Funds Rate that anchors the bond and overall interest rate environment.
  2. While some individual investors may be tempted to invest in a “conservative” manner, with more of an emphasis on capital preservation than growth, it is important to stay ahead of inflation when considering purchasing power. For example, if a still-working 60-year-old client had a retirement account and wanted to make sure that its purchasing power kept up with inflation, the portfolio’s average expected return should be well above that of the Consumer Price Index (CPI).
  3. The scourge of inflation is especially acute for retirees with a mostly fixed To keep up with the erosion in one’s purchasing power due to inflation over what could conceivably be a 30+ year retirement period, we are generally maintaining higher stock exposures for longer, contrary to conventional portfolios of 30-40 years ago.

3.  Why do ETF trades settle in two days? Is this changing?

  1. Currently, ETFs trade like equities, minute-to-minute, while the stock market is open. ETFs also settle like equities, two days following the executed trade (i.e. Trade Date plus 2 days, or “T+2”).
  2. On May 28, 2024, all equity and ETF trades will begin settling the next day (i.e., Trade Date plus 1 day, or “T+1”). This will match the industry convention for mutual funds and improve the liquidity of private account liquidity.