Fisher Investments: FOUR RULES TO LIVE BY

How does Fisher Investments tactically build and manage portfolios to execute a long-term strategy? Navigating the market can be a rough ride, but the job of Fisher Investments is to steer your portfolio in what we believe is the right direction and keep it on what we consider the right path. There will be times when the right direction feels wrong and uncomfortable, and there will be times you'll be tempted to go in the wrong direction because it feels right. Beginning with four basic rules of portfolio management will give you an investment compass, and remembering these four rules will keep you from veering away from your objectives.

1. Select a Benchmark

First, select an appropriate benchmark. An appropriate benchmark is necessary to measure relative risk and return, and should be consistent with the time horizon for the assets. A benchmark provides a framework to construct a portfolio, manage risk, and monitor performance by comparing rates of return over time.

Tactically, a portfolio should then be structured to maximize the probability of consistently beating the benchmark, thus maximizing the likelihood of long-term success. Unlike simply aiming to achieve some fixed rate of return each year, which will cause disappointment when the capital markets are very strong and is potentially unrealistic when the capital markets are very weak, a properly benchmarked portfolio provides a realistic guide for dealing with uncertain market conditions. Your time horizon and required rate of return are major factors in determining the most appropriate benchmark.

2. Analyze the benchmark's components and assign expected risk and return

The object is to beat the benchmark fairly consistently while controlling risk relative to the benchmark. For each security, sector, and country that comprise the benchmark, assign an expected risk and return. Anticipation of market conditions in specific sectors and countries allows us to weigh them accordingly in portfolio construction.

3. Blend dissimilar securities to moderate risk relative to expected return

The basic premise is to overweight those parts of the benchmark that are expected to outperform, and under weight those parts expected to underperform. Attempting to beat the benchmark means making calculated decisions based on which components we anticipate will outperform others. Our core strategy consists of overweighing countries and sectors concentrated on those allocations.

However it is also essential to build a counter-strategy into the portfolio, in case the core strategy fails to deliver. We do this by blending in negatively correlated securities and holding them in underweight positions relative to benchmark to moderate that risk. For example, if technology stocks are expected to outperform, we may also hold some stocks that tend to zig when technology stocks zag, like pharmaceuticals, to offset relative risk if tech underperforms.

4. Always remember that we could be wrong, so we don't veer from the first three rules

Over-confidence is a dangerous trait in portfolio management. It allows one to divert from investment objectives and assume sub-optimal levels of risk. That's why we always remember we could be wrong, so we maintain our discipline and don't forget the first three rules.

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