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40% of U.S. workers have saved
less than $25,000 for retirement.*

*2019 Retirement
Confidence Survey, EBRI

Only 42% of Americans know how
much money to save for retirement.*

*2019 Retirement Confidence Survey, EBRI

43% of retirees left
the workforce earlier
than planned.*

*2019 Retirement
Confidence Survey, EBRI

Our Style of Investing

Our Management Approach

The equity management approach detailed below is one that we have used successfully for many years.   This approach includes mutual funds, bonds, and stocks.  Asset Allocation – The basis of our approach is precisely customized Asset Allocation as laid out previously.  Our view of Asset Allocation is a rather simple one.  We feel that the only difference between an aggressive investor and one who is risk averse is the relative weighting of equities, bonds, and cash in their portfolios.  Aggressive investors would have more equities:  typically 80% to 90% of their total portfolio’s value.  Risk-averse investors would typically have as little as 10% of their portfolios in equities.  The remainder would be in bonds and cash.

 In our view, the thing these two investors would have in common would be the names of the equities that they each own.  With a few exceptions, they could each own the same companies.  The exceptions would be two-fold.  An aggressive investor might own more aggressive equities and cove the Nine Style Boxes¹ more fully where the risk-averse investor might have more large-cap equities.  And, the aggressive investor might own more specific stocks than the adverse risk investor.  This is because concentration creates more volatility, typically something that an aggressive investor can handle, versus a risk investor who tries to avoid wide fluctuations.

Historic Rates of Return

We rely on data detailing the historic rates-of-return of stocks, bonds and cash (we use the term cash to mean one-year U.S. Treasury bills).  These three asset classes have been traded in the United States since the 18th Century.  And whether you go back to 1802, 1900 or 1929, the numbers tell roughly the same story.  That is that large companies’ stocks have provided an average annual rate-of-return of just about 6.9% to investors from 1802.  Intermediate-term government bonds have returned roughly 3% and cash has provided an average annual rate-of-return of about 1.5%.  These numbers are net of inflation and based on the S & P 500 Index, the 10 year Bond Index and T-Bills.

 Because the annual rate-of-return of stocks, bonds, and cash has been documented for so many years, each separate year’s total annual return data (from1929 to 2002) represents a universe of “data points” that can be plotted and becomes a “bell curve”.  When these separate “data points” are plotted they reveal that the vast majority of occurrences fall into the first two standard deviations.  In other words, history has shown us that 95% of the time large companies’ stocks provided a rate-of-return of just about 10%, intermediate-term government bonds returned roughly 5% and cash returned about 2.5%.  That gives us a comfortable degree of certainty that, on average, over time, these rates-of-return will remain at their respective means.  Put another way: statistically speaking, we can be relatively confident that large-cap stocks should provide a rate-of-return of about 10%, intermediate-term government bonds should return roughly 5% and cash should return about 2.5%, on average, into the foreseeable future.  This is not guaranteed.  The same can be said about volatility or risk of each asset class. Recently we find that large-cap stocks have 14% volatility, intermediate-term bonds have about 2% and cash is negligible.  Remember that this is historical data compiled over a 70 year period.  And, you know, past performance is not indicative of future results.

Nevertheless, the data helps us in the construction of a client’s portfolio. It helps us to create a blend of equities, bonds, and cash that stands a very good chance of meeting the client’s objectives without introducing more risk into the portfolio that he or she is willing to take on.  We can do this if we understand the client’s rate-of-return objective and know how much risk he or she is willing to take to achieve it.  An Investment Policy Statement will determine much if carried out with diligence.  From a purely statistical point of view, we can also determine whether or not we are providing added value relative to those known historic rate-of-returns.

 Capital Preservation

Our approach is simple in that our main objective is to try and preserve clients’ capital.  That means sticking with things that are working and getting rid of things that are not.  But, more on that later.

 Investment Style

Chestnut Investment Advisory tends to lean toward mid-cap and large-cap value stocks.  There are four reasons for this.  Large, well-capitalized companies are typically less volatile than smaller, illiquid companies.  They are also easier to get into and out of because they are so liquid.  We like value stocks because we believe they are at lower risk than growth stocks.  However, we prefer companies that participate in the growth of the GDP which is more the result of people going out and buying toothpaste, groceries and upgraded software than it is from manufacturers retooling factories.  Consumers’ spending habits, after all, do make up two-thirds of the GDP.  Still, buying companies on sale, wholesale even, make up for a potential upside.


1. The Morningstar style box classification system has been the standard for evaluating mutual funds' investing strategies. This nine-box grid classifies funds according to capitalization (small, mid, or large) and investment style (value, blend, or growth).

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