Investing

Our philosophy on investing has its roots in the Nobel Prize winning strategy known as Modern Portfolio Theory. This strategy has at its core the basic concept of the "Efficient Market". This concept is widely accepted and is the cornerstone of passive investing.

An "Efficient Market" is one in which the prices of securities reflect all known information. The participants in the market have access to information on a timely basis, and that at any given point in time when this information changes, it is immediately incorporated in a new price by the market. Most economists view the established securities markets in the world as reasonably efficient. Many view the markets, given the real time nature of the information age, as very efficient.

If one believes that the market is efficient, then active investment management (defined as stock selection and market timing) are two activities that will not add any value. The market would have to be inefficient in order for stock pickers to be successful, i.e. they would have information that has not been reflected in the current stock price.

The graph below is based on a study of 91 Pension plans over a 10 year period. This study determined that 94% of a portfolio's return was based on the allocation of assets among stocks, bonds, and cash. Only 2% was attributed to market timing; shifting assets in and out of the market or between assets classes. Only 4% could be attributed to securities selection; finding misspriced securities in the market.

Index funds focus on the blue area while actively managed mutual funds focus on the orange and red slivers.In the large cap arena the S&P 500 is generally regarded as the representative index. The fact that this one stock market index has consistently outperformed the vast majority of mutual funds over many years is proof that the stock market is indeed efficient and that active managers have a tough time beating low-cost index mutual funds.

Whenever possible we utilize institutional index funds from Dimensional Fund Advisors, (DFA), because of their low cost and pure slices of the world's financial markets. We receive NO compensation of any kind from DFA, we just think they have the best mutual funds.