Partnership Investment Strategies: Portfolios Over $10 Million

A partnership is a formal arrangement between two or more parties to manage and operate a business, sharing its profits and liabilities. In a general partnership, all partners share liabilities and profits equally. However, in other types of partnerships, profits may be shared in different percentages, and some partners may have limited liability.

Partnerships can be a great way to pool resources and abilities, especially during the time-consuming startup stage of a business. They can also make the day-to-day operations of a business more manageable, as partners can benefit from each other's labour, time, and expertise.

When it comes to investment, a portfolio is a collection of financial investments or assets, such as stocks, bonds, commodities, cash, and cash equivalents. The core of a portfolio is usually made up of stocks and bonds, though it may also include a wide range of other assets, such as real estate, art, and private investments.

The right portfolio for an individual will depend on their risk tolerance, investment objectives, and time horizon. For example, an aggressive portfolio generally assumes greater risks in search of greater returns, while a defensive portfolio focuses on consumer staples that are impervious to downturns.

When it comes to partnerships with investment portfolios, it is important to consider the size of the portfolio in relation to the partnership. Larger portfolios may require more diverse investment strategies and may involve greater risks and potential returns.

Aggressive portfolios

An aggressive investment strategy is one that prioritises maximising returns by taking on a relatively high level of risk. Aggressive portfolios are generally suited to young investors with a higher risk tolerance who are still of working age. This is because they typically have longer time horizons, allowing them to weather market volatility without needing to sell securities or make withdrawals.

Aggressive investment strategies may be managed actively or passively. Active management involves buying and selling assets to beat the market's performance and requires more frequent adjustments in response to market conditions. Passive management, on the other hand, aims to replicate the market's returns by mimicking the makeup of an index.

Defensive portfolios

A defensive portfolio tends to focus on consumer staples that are impervious to downturns. Defensive stocks perform well in both good and bad economic times. These stocks are from companies that produce products essential to everyday life and can weather weakening economic conditions. They also tend to have stable operations and strong cash flows.

Some examples of defensive stocks include:

• Water, gas, and electric utilities
• Food, beverages, hygiene products, tobacco, and certain household items
• Major pharmaceutical companies and medical device makers
• Apartment real estate investment trusts (REITs)

A defensive portfolio may also contain high-quality, short-term bonds (such as Treasury notes) and blue-chip stocks.

While defensive portfolios can help reduce losses in more severe down markets, they may not eliminate them entirely. They also tend to trail in a strong up market, resulting in more muted gains.

Income-focused portfolios

Some stocks in an income-focused portfolio may also be found in defensive portfolios, but in this case, they are chosen primarily for their high yields. Examples of income-producing investments include real estate investment trusts (REITs) and master limited partnerships (MLPs). These companies return much of their profits to shareholders in exchange for favourable tax status.

• High-yield bonds: These may pay out 2.5% or more compared to a comparable-term investment-grade bond fund. However, it's important to note that adding more high-yield bonds to your portfolio also increases risk.
• Preferred stock funds: These offer a yield of 6% or higher and are considered a "hybrid" investment with both stock and bond characteristics. However, they are usually highly concentrated in financial companies with lower credit ratings and are sensitive to interest rate movements.
• Utilities funds: These hold stocks of utility companies and typically pay about 1.5% higher yields than other large value funds. They are also less volatile than most stock funds, making them a somewhat defensive investment choice.
• Dividend-focused funds: These funds hold stocks of higher dividend-paying companies and can pay about 1% higher yield than other large value funds.

When constructing an income-focused portfolio, it's important to consider your risk tolerance, investment objectives, and time horizon. Diversification is also key to managing risk and maximising returns.

Speculative portfolios

A speculative portfolio is for investors with a high tolerance for risk. Speculative investments are those with a high degree of risk, where the focus of the purchaser is on price fluctuations. The investor buys the tradable good or financial instrument in an attempt to profit from market value changes.

Speculative plays could include initial public offerings (IPOs) or stocks rumoured to be takeover targets. Technology or healthcare firms in the process of developing a single breakthrough product would also fall into this category. A young oil company about to release its initial production results would be a speculative play.

A speculative portfolio is one choice that requires a lot of research if it is to be done successfully. It also takes a lot of work. Speculative stocks are typically trades, not classic buy-and-hold investments.

Tax-efficient portfolios

Understanding Taxable and Tax-Advantaged Accounts

Taxable accounts, such as brokerage accounts, offer more flexibility and fewer restrictions than tax-advantaged accounts. Investments held in taxable accounts for more than a year are typically subject to long-term capital gains taxes, while those held for a year or less are taxed as ordinary income. On the other hand, tax-advantaged accounts like IRAs and 401(k)s provide tax breaks, either by deferring taxes until withdrawal (tax-deferred) or by offering tax-free growth and withdrawals (tax-exempt).

Choosing the Right Investments

When constructing a tax-efficient portfolio, it's crucial to select investments that complement the type of account. For example, municipal bonds, Treasury bonds, and Series I bonds are tax-efficient due to their tax-exempt status at the federal, state, and local levels. These are well-suited for taxable accounts. In contrast, corporate bonds, which lack tax-free provisions, are better held in tax-advantaged accounts.

Additionally, tax-managed funds, index funds, and exchange-traded funds (ETFs) tend to be more tax-efficient than actively managed funds as they generate fewer capital gains distributions.

Asset Allocation and Diversification

Diversification is a key concept in portfolio management. By spreading investments across different asset classes, sectors, and geographical regions, investors can reduce risk and potentially enhance returns. Asset allocation should be based on financial goals, risk tolerance, time horizon, and tax position.

Tax-Efficient Withdrawal Strategies

Retirees should consider tax-efficient withdrawal strategies when drawing from their portfolios. By prioritising withdrawals from taxable accounts, individuals can exercise some control over their tax payments in retirement. Additionally, consulting with a financial advisor or tax specialist can help investors optimise their tax strategies.

Frequently asked questions