Confident financial agent showing growth graph to couple. Mid couple meeting financial advisor for investment. Business people discussing the charts and graphs showing the results of their successful teamwork.

Investment Philosophy

jacobtedblog, Investment Management Leave a Comment

As a financial planner, I have strong convictions when it comes to my investment philosophy. I want my clients to invest in a way that is consistent with their risk tolerance and time horizons in a cost-effective manner. Ultimately, success is measured not by how much you earn but how much you keep.

Below are my three tenants of investing:

  1. Asset allocation is the most important decision an investor will make. The study most often cited is the Brinson, Hood, and Beebower study concluded that asset allocation explained 93.6% of the variation in a portfolio’s quarterly returns.
    • According to Vanguard,” Extensive research has shown that, if you have a diversified portfolio, a whopping 88% of your experience (the volatility you encounter and the returns you earn) can be traced back to your asset allocation. (Source: Vanguard, The Global Case for Strategic Asset Allocation (Wallick et al., 2012). In other words, your experience will be very consistent with that of any other diversified investor with the same asset allocation, no matter which specific investments they choose.
    • Others argue that the analysis is completely wrong. According to Allan Roth, there is only one predictor of portfolio performance in comparing funds of the same asset classes. PRICE. His conclusion: “Own the broadest index funds such as total U.S. stock, total international stock, and total bond funds with the lowest costs.”
  2. The track record for active management is not very good.
    • In September 2019 Andrea Riquier published an article where she cited a Morningstar report that found “only 23% of all active funds topped the average of their passive rivals over the 10-year period ended June 2019. What’s more, the cheapest funds succeeded more than twice as often as the priciest ones (33% success rate versus a 14% success rate) over those 10 years.”
  3. Is there a role for active management?
    • Active management can lower volatility, especially in turbulent markets. There is room for both. Morgan Stanley writes ‘The Most Favorable Result May Come from Combining Active and Passive Strategies.”
    • Active strategies work best in specific markets, such as international equities, commodities, and real estate.

This blended approach is reflected in my managed money strategy.

Leave a Reply