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Our process is built on: low cost, global diversification and tax-efficiency.
Academic research indicates that the only reliable variable in predicting a fund's long-run performance versus its benchmark is cost. The management cost and transaction costs erode a fund's return to the point that 70 percent of actively managed funds underperform their benchmark. The funds we use feature low-cost passive asset class investing. The funds are available only through approved advisors to insure that unnecessary buying and selling won't impose needless costs on fund investors.
Risk management is an important part of our management process. Equity risk is mitigated through global diversification. Not all asset classes have the same risk characteristics. By combining different types of assets (foreign and domestic, small and large companies, value and growth stocks) we reduce the risk of the overall portfolio while the expected return remains high. The following table depicts hypothetical portfolios using actual historical data from January 1994 to December 2004.
| Asset Classes |
Portfolio A |
Portfolio B |
Portfolio C |
| US Large Company |
100 |
50 |
30 |
| US Large Cap Value |
|
30 |
30 |
| US Small Cap |
|
10 |
20 |
| US Small Cap Value |
|
10 |
20 |
| Annualized Returns |
10.86 |
12.63 |
13.66 |
| Risk (Std. Dev.) |
15.21 |
14.80 |
15.20 |
Taxable accounts are managed in the context of the net after-tax returns. Careful tax planning can often save a meaningful amount of money. We never use funds that have a high turnover. Actively buying and selling within a fund causes a greater share of the return to be taxable in the current year. Funds with low turnover and exchange-traded funds enable the investor to defer taxable gains and increase the net return over time.
We create an investment strategy based on your individual needs.
We'll talk to you about your life, lifestyle, and financial needs, recommend an investment plan, and explain why it fits. There is no such thing as a "good investment" per se. What is appropriate for one person might be completely inappropriate for another. People don't all have the same time-horizon, risk-aversion, tax rate, expected educational or medical expenses, etc. A variety of factors influence the composition of one's investment portfolio. It makes no sense for a broker to cold call someone claiming to offer a "good investment opportunity" when the broker knows none of the relevant financial and personal information about that person.
In order for a financial advisor to give sound advice the advisor must know his client's current situation. No one would consider asking a medical doctor what prescription might lead to better health without giving the doctor some background on their personal health history.
As people grow and change, their financial needs often change as well. Investment portfolios should be modified accordingly. For example, as we approach retirement most of us should reduce our market risk and invest in more assets that will give us a reliable income to replace some of the labor income we will soon lose. On the other hand, I see many investors who make dramatic changes to their portfolios even though their situation does not warrant a major change. This usually occurs when people panic in the face of a sharp drop in the market or when greed motivates them to load up on risky assets because they don't want to miss out on the great returns they've witnessed recently. More often than not, investors are rewarded with higher long-term returns if they are disciplined enough to stick to a long-term strategy. We continually monitor both the client's investments and the client's overall financial situation and make the appropriate adjustments as needed.
Problems with Other Styles
Many investment styles have lost sight of the fact that investing, as properly understood, is a long-term proposition. Modern finance has a lot to say about how various assets behave over sufficiently long periods of time. As the time period shortens, there is less of an understanding. Transactions that aim to generate a return in periods as short as a quarter, a single month, or even a few days are more properly described as gambling.
Sector Rotation refers to an approach that attempts to consistently predict which industry will have the highest return over the next few weeks or months. Each year the ten industry groups present a wide range of performance. In 2003 Technology was the best (+51.04%) and Telecom was the worst (+7.33%) while the total market was up 30.75%. A year earlier Technology was the worst performer (-38.66%) and Real Estate was the best performing sector (+3.63). This approach tends to generate a high number of transactions and a high tax liability. It is also susceptible to unnecessarily wide swings in returns.
Brokers often call their clients with Hot Stock Tips. Hot stock tips are usually given to investors without regard to the individual's specific financial circumstances. Presumably some analyst knows when a given stock is going to soar.
Buy What You Know. With all due respect to world-renowned investment manager Peter Lynch, encouraging investors to just buy what they understand is dubious advice. Some people, like Lynch, understand a lot. Others don't really know much about business or finance.
Inside Information. Occasionally people base investment decisions on information from a friend or family member who works for a publicly traded company. This method amounts to little more than investing through happenstance and often leads to unhappy results because the "inside info" is incomplete.
So called "Hot Tips" are purported to give an investor a valuable insight based on proprietary research. The problem is that all of the financial and business data on publicly traded companies is public information. If the information contained in a hot tip is accurate, the information is probably already incorporated into the stock price. If the information is not widespread, it's probably not accurate.
Much of good investment advice amounts to properly aligning investment risk with an individual's specific situation. In order to avoid an inappropriate amount of risk, the advisor must know details about the investor. Factors such as age, income, life-style, personal goals, family situation, and personal tolerance for risk all play a part in what assets are most fitting for someone.
Market Timing is an investment method where an investor tries to assume a risky position when he believes the market will reward him and avoid risk when he believes risk will not be rewarded. Market timing leads to an inappropriate amount of risk most of the time, generates unnecessary transaction costs, and is not tax-inefficient.
In Momentum Trading, traders focus on stocks that are moving significantly in one direction on high volume. The main problems with this approach are poor diversification, poor tax-efficiency and high transaction costs. Momentum investing is essentially the act of chasing returns and concentrating one's investments in a narrow swath of assets that have preformed well lately. This is the investment style that loaded up on tech stocks in early 2000.
Advice from the Popular Media is not a sensible way to form an investment program. It is irresponsible for supposed experts to offer direction to people whom they have no knowledge of their circumstances.
Investors should avoid paying too much for a certain type of investment. There are three types of packaging where investors should be wary.
Loaded Funds are mutual funds that have a sales charge, usually about 5%, associated with the purchase or sale of the fund. Invariably the assets contained in the fund are available elsewhere without the sales charge.
Corporate Financial Firms offer investment management services that are usually competent. However you will pay up for a big name in finance just like you do in fashion. Big names charge big fees.
Hedge Funds encompass virtually every investment approach imaginable. Some are managed very conservatively, some extremely risky. One common characteristic is a relatively high fee structure.
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