Investment Philosophy
1) Keep investment costs low – building portfolios with low-cost index funds helps to improve the success rate of client retirement plans
2) Own tax-efficient investments – it’s not what you make, it’s what you keep - we intentionally own investments with ultra-low turnover (buying & selling)
3) Own broadly diversified asset classes – portfolios are designed to own investments with low and/or negative correlation to each other, providing proper diversification
Our investment philosophy begins with a general acceptance that markets are mostly efficient, and the long-term driver of a portfolio’s risk & return characteristics is asset allocation -- not security selection. Thus, we follow the empirical evidence supporting a passive investment approach.
In our experience, the narratives supporting an active investment strategy are typically spun by portfolio managers & financial advisors whose livelihoods depend on such an approach. Perhaps the most compelling indictment of active management is the semi-annual release of the SPIVA® scorecard, which – importantly – is free of survivorship bias. Year after year, this report shows us that the majority of active portfolio managers fail to beat their benchmark. And while it’s certainly possible for an active manager to outperform his benchmark in any given year, it’s highly improbable for this to happen on a consistent basis, and it’s impossible to know in advance which managers will outperform. Any outperformance from a single manager is what you would expect from a normal dispersion of outcomes (i.e. chance) and simply cannot be relied upon to repeat year after year. In fact, according to data compiled by Morningstar, the funds that do manage to outperform in a given year are not likely to outperform in the next. As the data go from 1 year to 5, 10, 15, and 20 years, the active win rate goes from slightly above 50% to about 10%, and the winners are known only in hindsight, not with foresight. It’s a loser’s game. With more than 90% of U.S. equity fund managers underperforming their benchmark over the 10-year period ending June 30, 2024 (see table below), an “average” indexing strategy would have, by definition, experienced top-decile returns.
While it’s unlikely that a professional portfolio manager will consistently pick stocks that will outperform his benchmark over longer periods of time, it’s even more unlikely that a financial advisor can pick the manager that’s going to pick the stocks that will outperform. Unlikelier, still, is the notion that you - the end investor - will select a financial advisor who will choose the portfolio managers who will pick the stocks that will beat a benchmark year-in and year-out. Rather than focusing on beating the market, we believe investors should focus on keeping costs low.
Morningstar has repeatedly shown us data that costs - above all else – are the best predictor of future returns. In their analysis, Morningstar split each asset class into quintiles, with the cheapest funds in one quintile, the second cheapest funds in the next quintile, and so on. Spoiler alert: cheapest-quintile funds were 3 times more likely to succeed than the priciest quintile.
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