When constructing portfolios, we rely on Modern Portfolio Theory, which explains how rational investors can employ asset allocation and diversification to optimize their portfolios. An optimal, or efficient, portfolio is one 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 us to try to capture the historic returns of the entire market rather than guessing which stocks will perform best. While we believe active portfolio management and individual stock selection are costly and a waste of time, we believe there are other ways to improve returns while controlling risk.
- We employ the Three-Factor Model, which indicates that small-company stocks and value stocks can be expected to provide better returns than large company stocks and growth stocks. Therefore, we overweight these factors in our portfolios.
- We also developed and apply a proprietary Portfolio Rebalancing Algorithm – a discipline we employ in an attempt to buy low and sell high without forecasting the market.
- Our Risk Assessment models provide a disciplined framework for evaluating market conditions. We remain invested in stock and bond market funds unless and until a model signals that risk is high; then, in an effort to reduce the chance of a major loss, we may move some or all of each client’s money to the safe harbor of a money market fund. We employ this tactic only sparingly.
To implement these financial engineering techniques, we invest only in mutual funds. We believe that mutual funds are the most intelligent, efficient and prudent way to invest. We search for high-quality mutual funds that deliver asset-class purity. Our preferred fund families are Dimensional, Fidelity, and Vanguard. Dimensional Funds are available to individual investors only through qualified advisors, including Classic Capital.
We work hard to keep clients’ costs down, so we are careful to select low-cost mutual funds. Over time, the seemingly small and sometimes-unnoticed fees charged by some mutual funds, and other costs incurred by some advisors, can significantly reduce returns.
Our investment methodology is conservative. We developed it for investing our own money and our family’s money, and it is now the approach we use to invest our clients’ money as well.
