Investment Philosophy
When investing, we follow the evidence
Our investment philosophy starts by taking a humble and rational approach toward the global investment landscape. We are well-versed in modern, evidenced-based investment strategies and seek to leverage them for the benefit of our clients. This approach has led us to the following principles which form the foundation of our investment process:
Markets are (mostly) efficient
Markets represent the collective intelligence and wisdom of billions of people and institutions. This makes markets very good (but certainly not perfect) at closing the gap between the price and intrinsic value of any given asset or security, even in the face of changing conditions.
In practice, the efficiency of markets makes it difficult to consistently add value by selecting individual stocks or bonds. Many very smart and very intelligent people try to do this every year. And the vast majority of them fail. In response, our investment approach relies almost exclusively on using low-cost, passive index funds or similar investment vehicles that do not try to outperform the broader market.
Long-term Approach
We believe that the vast majority of attempts to “time the market” (e.g. sell in advance of a market decline or buy in advance of a market rally) are doomed to fail. Most investors will benefit tremendously from taking a long-term approach to investing and ignoring the noise generated by day-to-day market fluctuations. When it comes to investing, we don’t measure time in months or quarters or years, but decades.
Diversification and low costs
When it comes to investing, diversification and low costs are paramount. We will use broad market mutual funds or exchange traded funds (ETFs) to help you gain exposure to a wide variety of asset classes and securities. These funds will also have low costs and low turnover (which can help further reduce trading costs and taxes).
For additional diversification, we also generally recommend international investments.
Focus on risk and asset allocation
Over the past 50 years, the U.S. stock market has plummeted by about 50% three times (1973-1974, 2000-2002, and 2007-2008). This is a stark reality. Over the course of your lifetime, you can presume that the “risky component” of your investment portfolio to get cut in half at least a few times.
You can think of this “risky component” as every asset in your portfolio that is not high-grade bonds or cash. For instance, if you have a $1,000,000 portfolio and allocate 50% to stocks and 50% to high-grade bonds, you can expect the value of your portfolio to drop by $250,000 periodically.
Another thing to note: a 50% drop in stocks is the expected case not the worst case. That is, you can expect a 50% drop to happen multiple times in over the course of a long-term time horizon. In essence, this is the price we must pay (or the pain we must endure) to earn the higher returns associated with risky assets. If stocks were not risky, then they would no longer be priced low enough to support higher returns.
We help you manage this risk by designing and implementing a portfolio asset allocation that is appropriate for your personal goals and requirements.
Taxes and asset location
Taxes are another area where we can reduce costs and improve portfolio dynamics. Investment funds with low turnover can limit the amount of taxable distributions in the investment portfolio. And we can also take advantage of the unique tax attributes of certain accounts (e.g. 401(k), 403(b), IRA, Roth IRA, HSA, etc.)
We are sensitive to helping clients manage legacy investment positions and embedded capital gains. If you bought a high-cost active mutual fund 20 years ago, we won’t simply recommend that you sell it. We will analyze the tax ramifications of selling so you can make an informed choice on the best path forward for your overall investment portfolio.
Factors can help
Even though markets are efficient, there are certain unique “factors” or investment traits that have proven to be profitable and durable over time. The most notable of these are size, value, and momentum. Therefore, we will tilt investment portfolios towards these factors when appropriate.
Infrequent trading
We will stay up to date on both the market environment and the performance of your investment portfolio. However, we will only recommend changes in rare circumstances. Once your portfolio is invested properly, we will not do much trading.
As Charlie Munger said, “The big money is not in the buying and the selling, but in the waiting.” We do not trade to appear busy.
Behavior matters
When it comes to investing, we can often be our own worst enemies. Panic selling near a market bottom, even a single time, can ruin a lifetime of solid investment returns. There is plenty of evidence that investors have a tough time controlling their emotions. As your advisor, we endeavor to help you prepare for turbulent markets and stay on course with your investment plan.