Our investment philosophy is backed by more than fifty years of academic research and Nobel Prize winning theory. We see markets as an ally, not an adversary. Rather than wasting time trying to discover ways markets are mistaken, we take advantage of the ways markets are right. We simulate thousands of possible lifetime-return scenarios to provide the statistical probability of attaining your financial goals
The asset allocation decision is shown to be by far the largest determinant of variation in returns. Therefore, we concentrate efforts on the total portfolio composition and how assets are allocated. While it does not eliminate the risk of market loss, diversification does help eliminate the random misfortunes of individual securities and positions your portfolio to capture the returns of broad economic forces.
TACTICAL ASSET CLASSES
Unlike index funds that follow commercial benchmarks, we utilize equity asset classes based on a security's market capitalization and price-to-book ratio that meet defined eligibility rules. To gain the purest representation possible, we seek to exclude securities that do not exhibit the general characteristics of the defined asset class. We also seek to eliminate securities that lack sufficient liquidity for cost-effective trading.
DIMENSIONS OF RISK
Expected return differences are largely driven by company size, relative price, and profitability. Academic research and results from practicing investors show that small companies have higher expected returns than large companies. Low relative price “value” companies have higher expected returns than high relative price “growth” companies. Companies with high profitability have higher expected returns than companies with low profitability.
In fixed income, expected returns are driven by the dimensions of term and credit. Longer-term bonds are more sensitive than shorter-term bonds to unexpected changes in interest rates. Bonds with lower credit quality have a greater risk of default than bonds with higher credit quality.
The cost to invest is critical in portfolio construction. Portfolios are constructed to represent the asset classes and markets we target at the least expensive cost. We minimize turnover and only place trades when there is a noticeable quantitative benefit.
We construct portfolios to minimize the impact of taxes. We consider the differences between types of accounts a client may hold: taxable, tax-deferred retirement vehicle, trusts, etc. Each of these accounts may have differing tax considerations. The location of assets within the different accounts, therefore, makes a significant difference in long-term wealth accumulation. In addition, we aggressively take tax losses, where appropriate, and consider the alternative minimum tax in our investment decision-making.
Most advisors would have you believe that they have the ability to look into a crystal ball for insights into timing— when to get you in and out of the market—and selection—picking the right stocks and bonds to own. They tell us they can beat the market if we buy the mutual fund or stocks they recommend. Historical results show this simply is not true. By speculating on the future, your long-term returns will not beat the market and you will simply incur more management costs and risks along the way.