We believe that it’s far better to utilize the tried and tested principles and theories when investing, rather than attempting to “outplay” the market. Some of these fundamental ideas we rely on are the Principles of Investing:
Capital markets do a good job of fairly pricing all available information and investor expectations about publicly traded securities
Comprehensive, global asset allocation can neutralize the risks specific to individual securities
Risk and Return
The compensation for taking on increased levels of risk is the potential to earn greater returns
Portfolio Structure Explains Performance
The asset classes that compromise a portfolio and the risk levels of those asset classes are responsible for most of the variability of portfolio returns
Modern Portfolio Theory
Another idea we rely on heavily is Modern Portfolio Theory. This theory explains how rational investors can employ asset allocation and diversification to optimize their portfolios. An optimal, or efficient portfolio is one that's expected to produce the highest return for a given level of risk, or the lowest risk for a given level of return.
We also rely on the Efficient Market Hypothesis, which encourages the act of trying to capture the historic returns of the entire market, rather than guessing which stocks will perform best. Active management, whether it's trying to identify the next hot stock or hot mutual fund manager, while appealing, has proven historically to be a waste of time and money. While some managers are able to generate better than market returns from year to year, to do so consistently net of fees and expenses has been proven beyond doubt to be detrimental to long term performance.
Four Factor Model
Fama and French developed the Three-Factor Model that helps determine the volatility and return expectations of our portfolios.
It’s well known that returns come from risk, and that gain isn’t easily accomplished without accepting some kind of risk. The problem is that not all risks carry a reliable reward.
The research conducted by Fama and French over the last fifty years has brought us to a powerful understanding of what these acceptable risks look like, which is detailed in the following equity factors:
Stocks have higher returns than fixed income
Small company stocks have higher expected returns than large company stocks
Lower priced “value” stocks have higher expected returns than higher-priced “growth” stocks
If profitability is the same, the lower the stock price, relative to book value, the higher the expected return.
Pursuing a Better Investment Experience
Fixed Income Planning
When it comes to fixed income, performance is largely driven by two elements: term and credit. Longer-term bonds are subject to the risk of unexpected changes in interest rates, while bonds with lower credit quality are at risk of default. Therefore extending bond maturities and reducing credit quality does increase potential returns.
The problem with taking on additional risk is that there isn’t enough compensation to justify it, which is why we generally keep the fixed income portion of our portfolio short term and high quality, taking on risk in equities where the compensation is higher.
In working hard to keep our clients’ costs down, and utilizing the theories outlined above, we generally invest solely in mutual funds.
We believe it’s the most intelligent and efficient way to invest, whether you have $50,000 or $500,000,000. Our team seeks out high quality mutual funds that deliver asset class purity in a cost efficient manner, our preferred fund family being Dimensional Funds (or Vanguard Funds in certain situations).
Dimensional Funds are only available through a select group of advisors, OG being one of them. We believe that ultimately there are a few key elements we can control: fees, taxes, diversification, and discipline. We work diligently to position our clients for success, leveraging our expertise and making deliberate and intelligent decisions that will continue to benefit them in the future.