Tim Courtney admits that financial markets do tend to break down from time to time.

A prime example, says the Oklahoma City, Okla.-based portfolio manager, is what's going on today in markets across the globe.

"But markets have proven to be efficient enough over the longer term to dissuade us from trying to time a recovery or squeeze any possible excess losses by using individual stocks," said the chief investment officer for Burns Advisory Group, which is headquartered in Oklahoma but has offices in California and Connecticut as well.

Courtney used to work with large institutional investors at Fidelity Investments on developing retirement plans and asset allocation requirements. He joined John Burns, who started the business and serves as its chief executive, in 1997.

These days, Courtney is a dedicated portfolio developer for the company's advisors across the country. He doesn't engage in individual stock analysis, but instead relies on the techniques and strategies of managers at Dimensional Fund Advisors. He also likes to sprinkle Vanguard Group index mutual funds and exchange-traded funds into allocations for high net worth and institutional client portfolios.

Preserving Capital Is Key

As the year comes to an end, he's making sure money set aside in more-conservative investments remains fully funded according to long-term allocation requirements.

"A lot of people are really focused on yields, so they've got enough interest to live on," said Courtney. "But we don't really look at just interest and yields. We're more focused on total returns and overall growth in a portfolio."

He prefers to take profits from stock positions when markets are doing well and use those proceeds to shore up bond positions. "We don't rebalance back to static allocations. Our ultimate concern is that we don't have to sell stocks when they're way down, like what we're going through now," said Courtney.

Investors who came to the firm a year ago and set up portfolios primarily leaning toward stocks would've seen their fixed-income positions being sold in 2008. "We didn't sell any stock positions this year," said Courtney. "And the reason we didn't is because we set aside enough in our clients' income reserves [through bonds] so we would not need to sell stocks at the wrong time."

He doesn't believe in rebalancing by calendar dates. "We prefer to rebalance based on asset cycles," said Courtney. "We want to make sure that there's enough set aside in a client's income reserves to meet their needs. The fastest way to deplete those reserves over time is by selling stocks at the wrong time."

As a result, portfolio weightings between stocks and bonds can be dynamic. "We don't really see huge swings from year-to-year," said Courtney. "And in most years, we don't even come close to using up someone's income reserves."

During the bear market of 2000-2002, he didn't sell stocks. "We lived off the income of bonds. And if that wasn't enough, we sold shares of the bond funds as a last resort," said Courtney. "There were areas of the market that were doing well, such as real estate, where we were also able to take profits to live on."

The same situation has taken place this year. Courtney has been selling shares of the Vanguard Total Bond Market Index Fund (VBMFX), the DFA Five-Year Government Fund (DFFGX) and the DFA Five-Year Global Fixed-Income Fund (DFGBX). "We've basically been selling anything with a lot of exposure to Treasuries, since those have been doing well this year," said Courtney. "But we're not dumping them wholesale. We're selling pieces of those positions to preserve income for our clients."

The proceeds gained from trimming those bond positions are going into the DFA Inflation-Protected Securities Fund (DIPSX). "With nominal Treasuries offering roughly 0% interest, we feel like TIPS offer a better investment opportunity going forward. And with the amount of money being created right now to deal with the economic problems we're going through, once the economic cycle rebounds, we'd rather hold TIPS than nominal Treasuries," said Courtney.

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