Our investment approach

Our investment philosophy.

The optimal investment approach for most long-term investors is to capture market returns at an efficient cost. This simple statement expresses our investment philosophy – a clear and practical principle that applies no matter the market conditions.

Investors do not need to outperform or out guess the markets to achieve their financial objectives. Trying to do so through security selection or market timing is costly and generally counterproductive. Most investors end up over paying and their investments under perform.

Decades of data demonstrate that outperforming the market returns for a particular asset class is highly improbable for most investors over the long-term. Since 2003, S&P Dow Jones Indices has published semi-annual and annual scorecards documenting the typically disappointing performance of actively managed funds against their respective market benchmarks.

Actively managed funds typically aim to “beat the market,” which means to exceed the market benchmark for the assets they hold. For example, for a fund investing in large company U.S. stocks, the market benchmark might be the S&P 500 Index. The benchmark for a fund investing in U.S. investment grade bonds might be the Barclays U.S. Aggregate Bond Index.

Fund managers try to do better than the market index they are matched against generally by using one of two broad strategies: 1) security selection (deciding what stocks or bonds to hold) or 2) market timing (deciding when to increase or decrease ownership or when to exit the market altogether).

The track record for active management underscores the difference between possible outcomes and probable outcomes.

  1. Not many funds outperform. In most years a majority of active funds in most categories underperform their market benchmark. Over longer periods, the overwhelming majority of funds underperform.
  2. Those that do outperform typically cannot do so for long. Most of those that do outperform in a given year do not do so with any consistency, or what S&P Dow Jones calls ‘persistence.’ For good reason we are continually reminded: ‘Past performance is not an indication of future results.’
  3. And not by much. The average underperformance is typically greater than the average outperformance. This means that in most cases investors are not fairly compensated for taking on the risk of investing with an active manager. On average, there is more to be lost than there is to be gained.
  4. We are not able to pick the winners in advance. ‘We’ means you, us, and virtually everyone else. Spotting superior performers in hindsight is easy. Identifying them in advance, never mind distinguishing skill from luck, is extremely difficult. There is little evidence to support the view that investment consultants can reliably identify superior managers in advance.

Those realities are the basis of our investment philosophy.

Our investment strategy.

We generally recommend index tracking funds… but we may use actively managed funds to fill a niche in a portfolio for which index funds do not offer a suitable choice.

We generally recommend index-tracking funds for the portfolios we manage. Index funds are mutual funds or exchange-traded funds (ETFs) that aim to achieve the same return, as near as possible, as a particular market index. They do this by mimicking or tracking the real world market exposure for a particular asset class. In most cases, index funds also are substantially less expensive than comparable actively managed funds.

Index funds are especially useful for taxable accounts because they generally experience lower turnover and therefore greater tax efficiency than actively managed mutual funds. We may use actively managed funds to fill a niche in a portfolio for which index funds do not offer a suitable choice in our judgment.

Our investment strategy further relies on the basic principles of asset allocation and diversification. These principles are so basic that they are often overlooked, but they remain essential portfolio building blocks primarily because they are effective techniques for reducing risk.

Asset allocation refers to the decision to invest across multiple asset classes with the aim of balancing risk and return. We believe that the allocation among various asset classes, such as stocks and bonds and their respective sub-classes, is the single most significant driver of portfolio performance. It is more important over the long-term than individual security selection or market timing.

Studies have shown that asset allocation determines ninety percent or more of the investment returns experienced by an investor. That means that security selection and market timing, the hallmarks of active management, are not significant factors.

We start by setting ranges for the broad asset classes. Then we consider your exposure within the sub-categories for each asset class and determine where you should have more, less or, in some cases, no exposure.

Diversification refers to investing broadly within an asset class by holding a large number of investments to minimize the impact of poor performance of an individual security on the overall portfolio. Index tracking funds are highly effective at providing diversification.

You need a plan.

It is far more important to stick to a good plan than it is to have the ‘perfect’ plan.

Before making any investment decisions, you need a plan. Many clients come to us with plenty of good investments taken individually, but they lack a clear objective or a plan to manage their investments. They may have no idea how their assets are allocated or should be allocated, what level of risk is appropriate for them, how their portfolio is performing, or how to withdraw money to support their retirement. They may not have given serious thought to managing their assets to minimize the tax impact. In short, they lack a plan.

Your plan develops out of a series of discussions and our analysis of your circumstances and objectives.

We use a “buy-and-manage” approach for the long-term investor.

We favor a strategy of sensible asset allocation and periodic re-balancing.

Once we have agreed on a plan and have made the appropriate investments, then what? Left to their own devices, most investors, whether they intend to or not, adopt a “buy-and-hold” strategy. This is less a strategy than a condition of total passivity and, ultimately, neglect. It would be better called “buy-and-forget.” From 2000 through 2009, a period of two bear markets, this approach was a path to frustration.

At the other extreme is the always tempting strategy of “market timing.” This attracts the hyper-active, hyper-aggressive or hyper-confident investor who is either willing to gamble or is brashly certain about being able to anticipate and outperform the markets. This, potentially, is a path to destruction. Between these two extremes is our preferred approach, “buy-and-manage.”

We reject the total passivity of “buy-and-hold” and the risk and futility of market timing in favor of a strategy of sensible asset allocation and periodic re-balancing, which is at the heart of “buy-and-manage.”

Once a plan is in place we monitor and measure performance. Periodically we will re-balance to stay in line with your target asset allocation, your objectives, and your risk profile. Rebalancing is simply the discipline of sticking to your plan.

It is far more important to stick to a good plan than it is to have the ‘perfect’ plan.

We insulate investors from their own worst behaviors.

The unfortunate reality is that the average investor doesn’t do as well as the funds he or she owns. The evidence for this is not merely anecdotal. Studies annually track the gap between the average return of funds and the average returns actually experienced by investors.

The problem is two-fold. To start, most funds across various asset classes underperform their particular market benchmark. Then, to make matters worse, investors on average do not perform as well as the funds they own.

Too many investors engage in self-destructive behavior. Fear, over-optimism, complacency, indifference and other emotions can derail a long-term investment strategy. So can attempts at market timing and chasing past performance.

It’s why we insist on starting with a clear investment philosophy up front. The solution lies in being an informed and disciplined investor. We help you become that by developing confidence in your plan, by creating reasonable expectations about market and investment performance, and by being well informed about the financial markets.

There are only four factors that can have a meaningful impact on investment performance: 1) market returns, 2) asset allocation, 3) costs, and 4) investor behavior. Market returns are the one factor over which investors have no control. Attempts to outperform or out think the market are typically costly and futile.

We focus our efforts on the factors we can control and that can have a meaningful impact on your investment performance: intelligent asset allocation, keeping costs low, and making disciplined, unemotional decisions. That’s our plan for you.