The Power of Evidence: Data-Driven Investment Strategies
Our investment philosophy is centered around one fundamental truth; we do not know what the market is going to do.
So, if we can’t predict what the market is going to do, how do we manage investments effectively?
First, and probably most importantly, we develop a deep understanding of what matters to our clients:
Why they are investing?
What are their goals?
When do they hope to have accomplished the goal?
Where are their financial resources located (pre-tax retirement accounts, savings at the bank, etc...)
How are their assets allocated (all in cash, all in stocks, some in bonds and stocks, etc...)?
What is their risk appetite?
Once we have a good feel for who they are, what they aim to achieve and how willing they are to take on various risks to achieve it, we establish an investor profile associated with an asset allocation.
Second, we eliminate the guesswork. We utilize a repeatable, data-driven approach, often referred to as “evidence-based investing”. Instead of basing decisions on near-term trends or “expert” opinions, we focus on historical data, leading indicators, and statistical probabilities to guide core asset allocation and tactical idea generation.
We favor this approach because it relies on facts, not opinions.
The goal of evidence-based investing is to create a disciplined and systematic framework to managing investments that is grounded in data and research. This approach seeks to align investment strategies with the best available evidence to improve the likelihood of achieving long-term financial goals while managing risk.
We follow a consistent, repeatable process focused on minimizing portfolio volatility and producing risk-adjusted returns across market cycles.
Third, we manage the portfolio on an ongoing basis. More specifically....
Our discretionary IRA portfolios combine core holdings (think broad market indexes like the S&P 500) with tactical tilts (sector or industry specific funds, like property and casualty insurance companies as an example), aimed to generate outperformance and manage risk. We adjust the portfolio at the beginning of each month, as there are no tax concerns when trading within an IRA account.
Our discretionary “after-tax” portfolios (individual, TOD, Joint TOD) maintain core holdings and are evaluated quarterly, and adjusted when deemed appropriate based upon the cost-benefit analysis of executing trades that may trigger a taxable event. Often, we wait for tax-loss harvesting opportunities to rebalance “after-tax” accounts to minimize the tax burden a trade may create.
So, how do we do pull off this sophisticated strategy as a boutique firm?
Well, for starters, we don’t do it alone.
We work with an independent, professional team, kind of like an outsourced Chief Investment Officer, that sources and evaluates data to identify leading indicators which are used to forecast broader shifts in the economy and market before they occur. The team translates this research into model portfolio guidance which we evaluate and implement on behalf of our clients.
The best part about this is that it adds no cost to our clients’ portfolios.
Most other active approaches come with much higher costs, be it underlying fund expenses, commissions and/or trades fees.
For example, according to a Vanguard study, the average net expense ratio (the underlying expenses of a fund excluding trade costs and advisor compensation) across actively managed mutual funds in 2022 was .47%.
To put that into context, that’s $47 of expenses for every $10,000 of portfolio value.
By utilizing low-cost Exchange Traded Fund’s, the net expense ratios of our portfolios range from .06% - .11%.
That is $6 - $11 for every $10,000 of portfolio value. Even at the top end, our portfolio expenses are still 75% less than the industry average of actively managed funds.
With zero commissions or trade fees on the Schwab platform, we are able to keep portfolio expenses extremely low while providing ongoing, hands on portfolio management.
So, to summarize:
We admit, we don’t know what the market is going to do short-term, and we don’t make decisions based upon guesses.
Our investment philosophy focuses on disciplined asset allocation and prioritizes risk-adjusted returns.
Our investment process is designed to deliver hands on management targeting better client outcomes with increased portfolio consistency.
Our portfolio management approach keeps expenses low, aims to improve ongoing risk management and utilizes tax efficient ETF's.
We’re not claiming to be Warren Buffett or Ray Dalio here, and I know we don’t have all the answers, but I am very confident in our investment philosophy and approach. If you’d like to discuss further or take a look behind the scenes at an example of the research that informs our decisions, please reach out.