Our disciplined approach focuses on market returns in each of the important asset classes of a well-diversified investment portfolio.
Efficient Market Hypothesis
Security markets are efficient and incorporate all publicly available information. This implies that investors cannot expect to consistently beat the market by picking individual securities or market timing.
Passive vs. Active
Academic studies show that professional investment managers do not achieve better risk-adjusted returns than the market as a whole. Passive investing is about investing for the long term in the entire market with low cost mutual funds and Exchange Traded Funds (ETF).
Diversification
Modern Portfolio Theory indicates that investors can construct portfolios using multiple asset classes to maximize a portfolio’s long-term expected return based on the client’s level of risk tolerance.
The Three-Factor Equity Model
Expected returns in the equity markets can be summarized using three factors:
Exposure to the overall market.
Small company stocks have higher expected returns than large company stocks.
Low-priced “value” stocks have higher expected returns than higher-priced “growth” stocks. Professors Eugene Fama, Sr. and Kenneth French believe that small cap and value stocks outperform because the market rationally discounts their prices to reflect underlying risk. The lower prices give investors greater upside as compensation for bearing this risk.
The Two-Factor Fixed Income Model
Fixed income returns scan be summarized using two factors:
Longer-term investments are riskier than shorter-term investments.
Instruments of lower credit quality are riskier than instruments of higher credit quality.
Institutional Investing
Investing using tax-efficient index mutual funds, Exchange Traded Funds (ETFs) and individual bonds result in lower taxes and investment costs.